M&T, Credit Suisse see biggest jumps in stress capital requirements

M&T Bank Corporation and Credit Suisse Holdings will have to increase their stress capital buffers by more than 2 percentage points based on their performance in this year's Federal Reserve stress test.

By October 1, M&T must increase its tier one equity capital ratio from the 2.5% minimum to 4.7%, while Credit Suisse will have to increase its buffer from 6.9% to 9%. 

Eleven other banks that participated in the annual stress test will also see their capital requirements increase for 2023, including DWS — a separately tested subsidiary of Deutsche Bank — which must increase its holdings by 1.5%, and Santander, which must add 1.2%, according to the Fed's large bank capital requirements report, released Thursday. 

Bloomberg News

Several others, including Bank of America, JPMorgan and Huntington Bancshares must increase their buffers by just under 1 percentage point. Seven banks will have lower stress capital requirements, including UBS, which will see its buffer shrink by 2.3%. 

Stress capital buffers are calculated by adding a bank's projected decline in tier one capital under the stress test scenario to its forecasted dividend payments for the coming four quarters. The minimum stress capital buffer is 2.5%.

Overall, tier one capital ratios among the 33 banks tested in this year's scenario, which was intentionally more severe than last year's evaluation, declined by 2.7%. In the 2021 scenario, which was calibrated to be less harsh because of the economic uncertainty at that time, capital reserves fell 2.5%.

The stress capital buffer is one of several bank capital requirements imposed on large banks to ensure they have enough risk-free capital to continue providing loans through periods of significant economic distress. 

The minimum tier one capital requirement is 4.5%. The largest institutions deemed Global Systemically Important Banks — Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street and Wells Fargo — also must maintain an additional capital reserve known as the GSIB surcharge. For next year, the surcharge ranges from 1% to 3%, depending on the institution. 

While the percentages are small, the additional requirements of increased stress capital buffers mean banks must shed riskier assets fairly quickly. Some large banks, including JPMorgan, Citigroup and Bank of America, are already in the process of paring down their balance sheets.

All 33 banks tested in this year's stress test weathered the scenario with well above the minimum capital requirement of 4.5%. But because aggregate capital declined more in this year's test than last year, Fed policy dictates that capital requirements must increase.

Banks and bank advocates argue this has become an unfair arrangement. They say if banks can withstand a collective loss of $600 billion — as was the case in this year's scenario — without dipping below the minimum requirement, they must be sufficiently capitalized.

Others say the fact that no banks are failing the test is an indication that the scenarios are not severe enough. 

Groups on both sides of the issue will look to Michael Barr, the Fed's newly installed vice chair for supervision, to take up the matter as part of his pledge to execute a holistic review of bank capital standards.