The Federal Reserve Board modified Morgan Stanley’s stress capital buffer requirement following a request by the firm for reconsideration.
As a result, Morgan Stanley’s requirement for this year is 4.3 percent, down from the previous buffer of 5.1 percent.
“Consistent with my view that the Board should use its inherent authority to set individualized capital requirements when appropriate, I support this modified capital requirement,” Fed Governor Michael Barr said. “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.”
The Fed’s stress test process allows banks to request reconsideration of their stress capital buffer requirement. The process involves the bank submitting a detailed explanation of why reconsideration should be granted. The Fed board then conducts an independent assessment of the request.
Based on the information presented by Morgan Stanley, the Fed determined that estimated losses in the bank’s fair value option loan portfolio were too conservative. This was due, in part, to the unique composition of the bank’s loan portfolio. Also, the board decided to use the bank’s second largest counterparty when measuring counterparty losses associated with default of the largest counterparty, as doing so would be more consistent with the Board’s treatment of similar counterparties.
Further, the Fed board will consider any potential stress test model refinements related to this request in its upcoming proposal to improve the transparency of the stress test.