Fed outlines $1 trillion in capital requirements for big banks following stress test results

Stress test results for HSBC North America 'affirmed'

Individual capital requirements for large banks that will ensure $1 trillion in “high quality capital” – enough for the banks to weather a deep recession and keep lending – were announced Thursday by the Federal Reserve.

In a release, the agency said the total common equity tier 1 (CETI1) capital requirement for each bank is made up of several components, including:

  • A 4.5% minimum capital requirement (the same for each firm);
  • A 2.5% minimum stress capital buffer (SCB), determined from the stress test;
  • A 1% capital surcharge for global systemically important banks (G-SIBs), where applicable.

The Fed said that large bank capital requirements are in part determined by the agency’s stress test results (announced earlier this year), which the Fed said provide a risk-sensitive and forward-looking assessment of capital needs.

The updated capital requirements, the agency said, “ensure that the large banks tested will hold roughly $1 trillion in high-quality capital – enough to survive a severe recession and still be able to lend to households and businesses.”

Also in Thursday’s announcement, the Fed said stress tests results for HSBC North America Holdings were “affirmed” following the firm’s request for reconsideration of the analysis. The Fed said the reconsideration of the results involved an independent group – separate from the stress testing group – that analyzed and evaluated the test grades.

But that process apparently led to some action by the Fed regarding future reconsiderations for other banks, according to the agency release.

“While affirming HSBC’s stress test results for this cycle, the Board also directed the staff to conduct a closer examination of issues raised in the reconsideration process to inform continuing improvements in its stress testing methodology for next year’s stress tests,” the agency said.

Federal Reserve Board announces the individual capital requirements for all large banks, effective on October 1