by Pete Schroeder
WASHINGTON (hooly-news.com) – The United States Federal Reserve on Monday announced the amount of additional capital large banks are expected to build up, following stress test results in various recession scenarios linked to the coronavirus.
These additional capital requirements, tailor-made for each bank – a first for the Fed, will apply from October 1.
Goldman Sachs and Morgan Stanley were thus asked to produce ratios of 13.7% and 13.4% respectively, the highest among the 34 banks subjected to these “stress tests”.
These additional new buffers follow stress test results released in June, which showed the 34 institutions could suffer up to $ 700 billion (€ 624 billion) in credit losses in the worst-case scenario of a recovery in “W” after the crisis.
The Fed has also decided to limit dividends for big banks and ban them from share buybacks until at least the fourth quarter, to ensure they have sufficient capital.
The new ratio combines the minimum capital requirements of 4.5% and the new “safety capital buffer”, which is determined by how each bank behaves in a severe economic downturn.
This additional cushion is at least 2.5%, and can climb to 7.8% under Deutsche Bank in the United States which holds the highest ratio.
Major US banking entities also face additional capital overload for their predominant role in the financial system, ranging from 1% to 3.5% for JPMorgan Chase, the nation’s largest bank.
The Fed also confirmed the stress test results of five banks that requested a review: BMO Financial Corp, Capital One Financial Corp, Citizens Financial Group Inc, Goldman Sachs and Regions Financial Corp.
This additional review showed, according to the Fed, that its stress testing patterns were working as expected and that there were no errors.
(French version Kate Entringer)