Coverage: weekly note · Information to 20 September 2024
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TGB Weekly Research Note · 20 September 2024
The largest US and Canadian banks reported CET1 ratios above their requirements at mid-year, while the US Basel III endgame stayed open and Canada slowed its own timetable.
The desk view
All 31 banks in the Federal Reserve's 2024 stress test stayed above their minimums, with the aggregate CET1 ratio projected to fall from 12.7% to 9.9%. At 30 June 2024, JPMorgan Chase, Bank of America, Citigroup and Morgan Stanley reported CET1 ratios between 1.2 and 3.0 percentage points above the requirements that take effect on 1 October 2024. Canada's six D-SIBs reported 12.8% to 13.5% at 31 July 2024, against OSFI's 11.5% expectation. The open question is the rulebook rather than the capital. The Fed's Vice Chair for Supervision intends to recommend a re-proposal of the US Basel III endgame that would raise G-SIB requirements by 9% in aggregate, and OSFI has delayed its next output floor increase by a year.
US banks: stress-tested and above their new requirements
The Federal Reserve Board's 2024 stress test found that all 31 participating banks stayed above their minimum CET1 requirements in a severe hypothetical recession, after absorbing projected losses of nearly $685 billion. The aggregate CET1 ratio falls by 2.8 percentage points, from 12.7% to 9.9%, a greater decline than in the previous test but within the range of recent ones. The scenario included a 40% fall in commercial real estate prices and a 36% fall in house prices, and the Board linked the larger drawdown to higher card balances and delinquencies, riskier corporate portfolios, and higher expenses with lower fee income.
The results fed into final individual requirements, announced on 28 August 2024 and effective on 1 October 2024. Each bank's CET1 requirement combines a 4.5% minimum, a stress capital buffer (SCB) of at least 2.5% and, where applicable, a surcharge for the largest and most complex banks. The margin over that full requirement, not over the 4.5% minimum, is the figure that matters for capital planning.
On that measure the four US G-SIBs in the table were all in surplus at 30 June 2024, from 1.2 percentage points at Bank of America, which the bank itself put at 122bp, to 3.0 percentage points at JPMorgan Chase.
US G-SIBs: CET1 ratio at 30 June 2024 vs requirement from 1 October 2024
| Bank | SCB | G-SIB surcharge | CET1 requirement | CET1 ratio, 30 June 2024 | Margin (pp) |
|---|---|---|---|---|---|
| JPMorgan Chase | 3.3% | 4.5% | 12.3% | 15.3% | 3.0 |
| Bank of America | 3.2% | 3.0% | 10.7% | 11.9% | 1.2 |
| Citigroup | 4.1% | 3.5% | 12.1% | 13.6% | 1.5 |
| Morgan Stanley | 6.0% | 3.0% | 13.5% | 15.2% | 1.7 |
Source: Federal Reserve Board, Large Bank Capital Requirements, August 2024, 28 August 2024; JPMorgan Chase, 2Q24 results, 12 July 2024; Bank of America, 2Q24 results, 16 July 2024; Citigroup, 2Q24 results, 12 July 2024; Morgan Stanley, 2Q24 results, 16 July 2024.
Canada: a buffer held and a floor delayed
On 18 June 2024 OSFI kept the Domestic Stability Buffer at 3.5% of risk-weighted assets, so the six domestic systemically important banks (D-SIBs) remain expected to target a CET1 ratio of at least 11.5%. OSFI judged systemic vulnerabilities to be elevated and broadly stable, with near-term risks low but rising, and asked the D-SIBs for heightened prudence in capital management.
Results for the quarter to 31 July 2024 put all six above that level, from 12.8% at TD to 13.5% at National Bank of Canada; TD's margin was therefore 1.3 percentage points.
Canadian D-SIBs: CET1 ratio at 31 July 2024, %
Source: National Bank of Canada, Q3 2024 results, 28 August 2024; Scotiabank, Q3 2024 results, 27 August 2024; CIBC, Q3 2024 results, 29 August 2024; Royal Bank of Canada, Q3 2024 Report to Shareholders, 28 August 2024; BMO Financial Group, Q3 2024 results, 27 August 2024; TD Bank Group, Q3 2024 results, 22 August 2024.
The Basel III endgame: a re-proposal still to come
The uncertainty in the US concerns the rules rather than current capital levels. The joint proposal of 27 July 2023 by the Federal Reserve, FDIC and OCC was estimated to raise aggregate CET1 requirements for affected bank holding companies by 16%, with a transition starting on 1 July 2025 and full compliance from 1 July 2028.
On 10 September 2024 the Fed's Vice Chair for Supervision said that broad and material changes were warranted and set out an intention to recommend that the Board re-propose both the endgame and the G-SIB surcharge rules. Taken together, the re-proposals would raise aggregate CET1 requirements for the G-SIBs by 9%. For other large banks the main effect would come from recognising unrealised gains and losses on securities in capital, equivalent to a 3% to 4% increase in requirements over the long run.
Canada has moved in a different order. It concluded its implementation of the Basel III 2017 reforms in early 2024 but, on 5 July 2024, delayed the next output floor increase by a year to consider the timetable in other jurisdictions. The floor now stays at 67.5% in fiscal 2025 rather than rising to 70.0%.
The 9% figure is a recommendation set out in a speech, not a rule the Board has adopted, so the eventual US calibration remains uncertain. On mid-year figures, though, the debate on both sides of the border is about calibration and timing rather than any capital shortfall at the largest banks.
What to watch
- 1 October 2024: new US large-bank CET1 requirements, including the 2024 stress capital buffers, take effect.
- Fiscal 2026: under OSFI's revised schedule the output floor rises to 70.0%.
Primary sources: JPMorgan Chase, 2Q24 results, 12 July 2024; Bank of America, 2Q24 results, 16 July 2024; Citigroup, 2Q24 results, 12 July 2024; Morgan Stanley, 2Q24 results, 16 July 2024; Royal Bank of Canada, Q3 2024 Report to Shareholders, 28 August 2024; TD Bank Group, Q3 2024 results, 22 August 2024; BMO Financial Group, Q3 2024 results, 27 August 2024; Scotiabank, Q3 2024 results, 27 August 2024; CIBC, Q3 2024 results, 29 August 2024; National Bank of Canada, Q3 2024 results, 28 August 2024; Federal Reserve Board, The Next Steps on Capital, speech, 10 September 2024; Federal Reserve Board, Large Bank Capital Requirements, August 2024, 28 August 2024; OSFI, Domestic Stability Buffer letter, 18 June 2024; OSFI, Output floor delay, news release, 5 July 2024; Federal Reserve Board, Final capital requirements for large banks, press release, 28 August 2024; Federal Reserve Board, 2024 stress test results, press release, 26 June 2024; Federal Reserve, FDIC and OCC, Basel III endgame proposal, press release, 27 July 2023.