Federal Reserve Announces Final Large Bank Capital Requirements with First Successful SCB Appeal in 2024

The Federal Reserve recently announced the final large bank capital requirements, including the Stress Capital Buffer (SCB), which reflects the results of the 2024 stress tests. This announcement is significant because it includes the first successful appeal of the SCB, marking a notable moment in the regulatory landscape for large banks.

Details of the SCB Requirements

The SCB is a key component of the Federal Reserve’s regulatory framework, designed to ensure that large banks have sufficient capital to absorb losses during economic stress. It takes into account the capital depletions projected under the Fed’s stress tests, plus four quarters of planned dividends for each bank. The final requirements go into effect on October 1, 2024, impacting how banks manage their capital​(PwC).

The Successful Appeal

For the first time since the SCB was introduced in 2020, a bank successfully appealed its SCB requirement. The bank argued that certain recent expenses, such as impairment of goodwill and losses associated with the write-down of consolidated investment entities, should not influence projections of noninterest expense. The Federal Reserve agreed to modify the SCB for this bank, acknowledging inappropriate treatment applied to certain input data for Pre-Provision Net Revenue (PPNR) projections. However, the Fed maintained its position on the fundamental modeling approach for other aspects of the bank’s arguments.

This appeal’s success is notable both for its rarity and the substantive grounds that convinced the Fed to make an adjustment. It signals that while the Fed is open to reasoned, data-backed requests for reconsideration, it remains cautious about altering its fundamental stress test models without thorough evaluation and validation​(PwC).

Implications for the Banking Sector

The increase in SCBs for many firms following the 2024 stress tests has sparked discussions about whether U.S. banks are already highly capitalized and the potential impact of future regulatory changes. The successful appeal could prompt other banks to identify and challenge similar exposures that may be inflating their SCBs.

Moreover, the Fed’s openness to considering adjustments might indicate a willingness to re-evaluate aspects of its regulatory framework, potentially in response to industry feedback. However, any fundamental changes to stress testing models would require a transparent process, including testing and validation, to ensure that they maintain the integrity of the financial system.

Conclusion

The final large bank capital requirements and the successful appeal of the SCB mark important developments in the regulatory environment for large banks. These changes reflect an ongoing dialogue between regulators and the banking industry, balancing the need for financial stability with the challenges banks face in managing capital effectively. The implications of these adjustments will be closely watched as they influence how banks operate within the evolving regulatory landscape.