Wall Street banks could face higher capital hurdles under a Federal Reserve proposal that would mark the most significant rewrite of requirements put in place after the 2008 financial crisis.
In a statement issued Tuesday, the Fed said it is considering implementing a “stress capital buffer” to better tailor its capital demands on the largest banks, such as Wells Fargo & Co. and JP Morgan Chase & Co., as well as smaller ones.
The Fed said such a change could “somewhat increase” capital requirements for the largest lenders, though the regulator added that it believes the firms already have enough of a cushion to clear the proposed hurdle. Meanwhile, less systemically important banks would see modest reductions in the capital they need to maintain, according to the Fed.
The idea of a stress-capital buffer was first floated by former Fed Governor Daniel Tarullo in 2016 to better integrate bank capital rules with the agency’s annual stress testing.
“This proposal significantly simplifies our capital regime while maintaining its strength,” Fed Vice Chairman for Supervision Randal Quarles said in the statement. “It is a good example of how our work can be done more efficiently and effectively.”
In a concession to banks, the Fed also proposed easing some aspects of its stress tests by changing assumptions it has made about how the firms would behave in another meltdown. A key revision would remove the expectation that lenders would grow their balance sheets and continue to pay out dividends when facing severe economic headwinds.
The proposed rule, open for a 60-day public comment period, would tie the new capital buffer to each company’s performance in the Fed’s stress tests and scrap what’s known as the “capital conservation buffer.” That would marry the stress tests to the industry’s risk-based capital requirements put in place after the financial crisis, reducing tensions between day-to-day capital demands and the annual stress-test minimums the firms have to clear.
The Fed estimated the change could mean tens of billions more capital for the biggest and most complex banks and about the same decrease for capital required at the smaller firms. Using last year’s tests, the overall capital demand on the banking industry would have been about $30 billion less, the Fed indicated.