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August 4, 2022

Fed Stress Capital Buffers for Large Banks Fail to Ensure Large Banks Have Enough Capital at a Time of Stress and Uncertainty

WASHINGTON, D.C.—Phillip Basil, Director of Banking Policy at Better Markets, released the following statement in response to today’s Federal Reserve release of stress capital buffer requirements for the largest banks:

“At a time of heightened risks to the economy, skyrocketing inflation, and extreme uncertainty, the Federal Reserve’s stressed capital buffers (SCBs) that were released today will provide the public little comfort that those banks have enough capital to withstand economic and financial stress without another bailout. That’s because those buffers are based on the Federal Reserve stress tests, which once again this year have proven to be too stress-less and no longer stress or test Wall Street’s biggest banks.

“Nearly two-thirds of the country’s largest banks had stress capital buffers this year that either decreased or remained the same as last year. That includes five of the eight largest, most complex, systemically important too-big-to-fail banks, a shocking and unsettling result considering the risks these banks pose to the financial system and livelihoods of all Americans. Additionally, although the SCBs for three systemically important banks increased  – JP Morgan Chase, Bank of America, and Citigroup – that increase was almost entirely due to their reduction throughout last year of reserves set aside for loan losses, which boosted their reported profit numbers. Without those reductions, their SCBs would have been almost the same as the previous year.

“The stability in the SCB requirements year over year seems to be a goal that the Fed thinks is a benefit by making them more stable and predictable for the biggest banks. But that has in fact contributed to a weakening of the stress-based capital requirements and the capital planning process.  Despite claims by JP Morgan Chase CEO Jamie Dimon that the stress test is ‘capricious,’ it has once again proven to be the opposite, allowing large banks like his to plan to the same capital requirement each year. These banks face many different risks, and without variation in the stress test and its results, Wall Street’s biggest banks will not be well capitalized against the wide and varying range of risks.

“The Fed must restore the stress in the stress test to ensure more meaningful stress-related capital requirements. Additionally, they must address the other ways in which the Fed has dangerously weakened the capital planning programs to adequately protect the American taxpayer and economy from another financial crisis and bank bailouts.”

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Better Markets is a non-profit, non-partisan, and independent organization founded in the wake of the 2008 financial crisis to promote the public interest in the financial markets, support the financial reform of Wall Street and make our financial system work for all Americans again. Better Markets works with allies – including many in finance – to promote pro-market, pro-business and pro-growth policies that help build a stronger, safer financial system that protects and promotes Americans’ jobs, savings, retirements and more. To learn more, visit www.bettermarkets.com.

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