The Federal Reserve announced on 28 August 2024 the final individual capital requirements for all large United States banks, to take effect from 1 October 2024, confirming the outcome of the annual stress-testing exercise and making one notable adjustment: Goldman Sachs's stress capital buffer was revised to 6.2% from a preliminary figure of 6.4% following a formal reconsideration request submitted by the firm.
Under the framework that governs capital requirements for large US banks, each institution must hold a minimum Common Equity Tier 1 capital ratio composed of the standard 4.5% regulatory minimum combined with a stress capital buffer of at least 2.5%. The stress capital buffer is set individually for each institution based on the results of the Federal Reserve's annual stress tests, which simulate the losses a bank would incur under a hypothetical severe economic downturn. Banks with higher projected losses under the stress scenario are assigned a larger buffer, requiring them to hold more capital against those potential risks.
GOLDMAN SACHS RECONSIDERATION
The adjustment to Goldman Sachs's stress capital buffer, reduced by 20 basis points to 6.2% from the preliminary 6.4% set following the stress test results, followed a reconsideration request. Under the Federal Reserve's rules, firms have the right to submit a reconsideration request after receiving their preliminary stress capital buffer, presenting additional information before the requirements are finalised; in Goldman's case the Board adjusted the treatment of particular non-recurring historical expenses in the models' input data.
Under the framework, the total CET1 requirement for each bank varies based on the severity of projected losses in the stress test.
REQUIREMENTS COVER ALL LARGE US BANKS INCLUDING GSIBS
The final capital requirements apply to all large US banks subject to Federal Reserve supervision, including the US globally systemically important banks. For the GSIBs — the group of institutions deemed most critical to the functioning of the global financial system — capital requirements also incorporate a GSIB surcharge calculated on the basis of each firm's systemic footprint, including measures of size, interconnectedness, complexity, cross-jurisdictional activity, and reliance on short-term wholesale funding.
The Fed said the requirements are informed by its stress test results, which provide a risk-sensitive and forward-looking assessment of capital needs; a bank whose capital falls below its total requirement faces automatic restrictions on capital distributions and discretionary bonus payments.