Dive Brief:

• The Federal Reserve has adjusted Morgan Stanley’s stress capital buffer requirement for this fiscal year, from 5.1% to 4.3%, according to a Tuesday news release from the central bank. The change is effective Wednesday.
• Morgan Stanley requested the modification in late August, after the Fed laid out new individual capital requirements for large banks following its annual stress testing.
• After reviewing information Morgan Stanley submitted, the central bank’s board determined estimated losses in the bank's fair value option loan portfolio were “too conservative,” partly due to “the unique composition” of the bank's loan portfolio, according to Tuesday’s release.

Dive Insight:

Morgan Stanley’s successful petition follows that of Goldman Sachs, which last year asked the central bank to reduce its stress capital buffer requirement from 6.4% to 6.2%. The Fed then trimmed it further, to 6.1%. That marked the first time since 2020 that a bank had persuaded the Fed to budge on a buffer designation. (Eight other banks’ petitions had failed in those years.)

Morgan Stanley “appreciates the Federal Reserve’s careful reconsideration” of the bank’s most recent stress test results, CFO Sharon Yeshaya said in a Tuesday statement. The bank’s stress capital buffer requirement results in a common equity tier 1 ratio of 11.8%; the ratio was 15% as of June 30, the bank noted

The Fed, in a unanimous vote, said it also opted to use Morgan Stanley’s second-largest counterparty, when measuring counterparty losses associated with default of the largest counterparty, since that would better align with the central bank’s treatment of similar counterparties.

Yeshaya said the bank looks forward “to continued constructive engagement with the Federal Reserve on the stress testing framework.”

“Morgan Stanley remains focused on ensuring we have long-term capacity to support global client engagement, invest in our core businesses and consistently grow our quarterly dividend,” Yeshaya said.

Big-bank capital requirements are informed by the Fed’s stress test results. Those were released in June, with all 22 banks demonstrating they have sufficient capital to withstand a severe recession and continue lending while remaining above minimum capital requirements. This year’s scenario wasn’t as harsh as last year’s, however.

The Fed has proposed changes to stress testing aimed at reducing volatility and increasing transparency. On Tuesday, the central bank said it “will also consider any potential stress test model refinements related to this request in its upcoming proposal to improve the transparency of the stress test.”

Fed Gov. Michael Barr, the former vice chair for supervision, issued his own statement Tuesday noting his support for the modification “consistent with my view that the Board should use its inherent authority to set individualized capital requirements when appropriate.”

“I look forward to seeing the Board use its authority to adjust capital requirements when they are too low, as well as when they are too high, given the risks posed by individual firms,” Barr said in the statement.