Big-bank CEOs may be somewhat less apt to gripe about regulation than they were in the recent past, but one particular government constraint now has their full attention.
During a recent earnings call, one renowned chief executive expressed frustration with higher capital requirements that many large and regional banks will likely have to meet in the wake of the Federal Reserve’s most recent stress tests.
In comments about the stress capital buffer, an additional layer of cushion introduced in 2020, JPMorgan Chase CEO Jamie Dimon gave a typically blunt assessment.
“It’s a terrible way to run a financial system,” he said.
At JPMorgan and numerous other large banks, the stress capital buffer is expected to increase on Oct. 1. The new standard will generally drive up the amount of capital the banks must hold to remain solvent and protect against potential economic crises in the year ahead.
Some banks have announced their anticipated stress capital buffers. JPMorgan said it expects its buffer to rise from 3.2% to 4.0%. Other banks anticipate even larger increases. The Fed is expected to release the final figures this summer.
Bankers and industry watchers had been expecting higher capital requirements, given that this year’s stress tests were more severe than those used in 2021. But the projected year-over-year changes at some large banks were larger than some experts had been anticipating. And they sparked a lot of conversation during bank earnings calls this month.
“One hundred basis points is a lot,” said Francisco Covas, head of research at Bank Policy Institute, which represents large banks, before noting that some banks suspended share buybacks to meet the new requirements.
“That highlights that the volatility in capital requirements has real economic consequences,” Covas said.
The Fed crafts new stress test scenarios each year. They are designed to be countercyclical, meaning they are less severe during periods of economic hardship. But overall the central bank has sought to make the tests progressively more challenging. This effort has become a point of frustration for banks, which have seen their capital requirements increase even when they pass the test with relative ease.
This year, all 33 banks tested withstood the Fed’s scenario without coming close to their minimum capital ratios. Still, many of them will have to bolster their stress capital holdings next year. The concern among banks is that these increases will continue until they become a binding constraint.
When the stress capital buffer was rolled out two years ago, most banks “were supportive” of it, in part because “it made certain aspects of the regime less complicated and more transparent,” said Sean Campbell, chief economist and head of research at the Financial Services Forum, a trade organization whose members are the CEOs of the nation’s eight largest banks.
But the buffer has been criticized for being too volatile and for not lining up with banks’ assessment of their own risks, Campbell said. He also noted that banks generally want more transparency around stress tests.
On Friday, one regional bank asked the Fed to reconsider its stress capital buffer. In a regulatory filing, Huntington Bancshares in Columbus, Ohio, said it has submitted a request to the agency to reassess the “indicative” buffer of 3.3% associated with the bank’s latest capital plan.
Huntington, whose stress capital buffer is currently 2.5%, said it expects the Fed to make a decision sometime before Aug. 31.
Citigroup, which anticipates its stress capital buffer will rise from 3% to 4%, has put the brakes on share buybacks for now. But during Citi’s most recent earnings call, there was little indication that the megabank will do much with its balance sheet.
“Obviously, we don't control the regulatory capital framework, but we're not managing for short-term shifts” in the stress capital buffer, CEO Jane Fraser said during the $2.4 trillion-asset company’s July 15
“As you know, the banks experience considerable variability in the [stress capital buffer] each year. It's very much dependent on the scenario chosen.”
At Bank of America, the stress capital buffer is expected to rise about 100 basis points above its current 2.5% level. Plans are underway to build capital to address the higher requirements, CEO Brian Moynihan said during the Charlotte, North Carolina-based company’s July 18
At Goldman Sachs, meanwhile, the stress capital buffer is actually expected to decrease this fall, seemingly because of actions the bank took to manage the requirement. Goldman said in a June 27 press release that it expected its new buffer to be 6.3%, down from 6.4% currently.
The New York bank has been trying to reduce the size of its balance sheet over time by cutting some private-equity investments, in a move aimed at lowering its capital requirements.
“I do think, as indicated by the step forward we took in the stress test, that we will hopefully take other steps forward in future tests as we continue to change that mix,” CEO David Solomon said during the company’s July 18 earnings call.
JPMorgan, the nation’s largest bank by assets, has already been taking steps to stockpile capital, and it is considering more such moves.
This year’s stress-test results show large banks have more than enough capital to deal with a major economic crisis, but their capital requirements will likely go up anyway. That has some observers and industry officials concerned credit will tighten even as the economy teeters on the edge of recession.
The $3.8 billion-asset bank has temporarily paused share repurchases. During the second quarter, it reduced risk-weighted assets, and it might take the same action during the third quarter, Dimon said during the
Plus, JPMorgan is likely to “drive down mortgages” and other credit that contributed to the buffer, he said.
“So we're going to manage the balance sheet, get good returns,” he said. “I'm not worried about it. We just want to get there right away. I don't want to sit there and dawdle.”
Dimon did not hold back in his assessment of the stress tests. He called them “inconsistent,” “too volatile,” “basically capricious” and “arbitrary.”
Kyle Campbell contributed to this report.
