Morgan Stanley asks Federal Reserve to cut capital requirement

Morgan Stanley asked the Federal Reserve to reduce its capital requirements, the regulator said as it announced upcoming capital requirements for most Wall Street banks that are in line with lenders’ expectations.

“The firm requested reconsideration to reduce this requirement,” the Federal Reserve said in a statement Friday. “The board is reviewing the request to reduce the firm’s stress capital buffer requirement,” and plans to make and publish a decision by Sept. 30.

Banks’ Stress Test

The central bank’s announcement formally wraps up its annual stress-tests exercise, a multistep process that assesses how the nation’s largest lenders are likely to perform under hypothetical economic conditions. It concludes with an updated total Common Equity Tier 1 capital-ratio requirement for each firm, which will take effect Oct 1.

A total of 22 banks, including Morgan Stanley, underwent and comfortably passed this year’s Fed stress test that determined they would be able to withstand more than $550 billion in losses. Friday’s capital requirements tied to that test is made up of several components, including a minimum CET1 capital-ratio requirement of 4.5% — the same for each company — and the stress capital buffer requirement. The biggest lenders, or so-called global systemically important banks, are also subject to a capital surcharge.

The Fed’s announcement comes as the industry awaits the outcome of the Fed’s planned changes to its stress-test process. In April, the agency unveiled a proposal to average results over two years when setting capital requirements. Michelle Bowman, the Fed’s vice chair for supervision, has said that potential changes would help the agency address the “excessive volatility in the stress-test results and corresponding capital requirements.”

Banks’ Transitional Period

“The individual capital requirements announced today represent a period of transition,” Bowman said in the statement, adding that finalizing the April plan would be an important next step to reducing year-over-year volatility in bank capital requirements.

The Fed also unveiled plans to decrease what’s called the enhanced supplementary leverage ratio, which requires banks to hold a certain amount of capital relative to their assets. The regulator also will move to propose a fresh risk-based capital plan that Wall Street has advocated for.