Fed: Higher Capital Requirements on the Horizon for GSIBs

The nation’s eight largest banks will face more stringent, costly capital requirements under the Comprehensive Capital Analysis and Review stress test program, Federal Reserve Board Governors Tarullo and Powell said today. The governors signaled that that Fed will apply its capital surcharge to the annual Comprehensive Capital Analysis and Review test, effectively raising the minimum capital standards for banks designated as globally significant institutions.

The capital surcharge rule — which was finalized last July — requires GSIBs to hold additional capital buffers between 1 and 4 percent to offset the systemic risk they pose to the financial system. Many bankers and investors have long been concerned about the possibility of having the surcharge added to the CCAR program, as holding more capital in reserves could cause lending and other business line activities to tighten.

Powell noted that he “has not reached any conclusion that a particular bank needs to be broken up,” but added that the Fed’s goal in adding the capital surcharge is to “raise capital requirements to the point at which it becomes a question that banks have to ask themselves.”

While the largest banks will face tougher capital requirements, Tarullo suggested in a separate interview today that the Fed may relax certain qualitative requirements for midsize banks – those with assets under $250 billion — under the CCAR program. Tarullo told Bloomberg TV that after conducting a review of the CCAR program, the Fed will likely propose to remove those requirements for the 2017 testing cycle.

“I think the direction in which we’re moving would be for banks that are under $250 billion in assets and are basically very traditional banks… to take them out of the qualitative side of the test. I hope and expect that will relieve a lot of the compliance costs,” Tarullo said.