Federal Reserve Board – Federal Reserve Board modifies Morgan Stanley’s stress capital buffer requirement, after the firm requested reconsideration

The Federal Reserve Board on Tuesday modified Morgan Stanley’s stress capital buffer requirement, after the firm requested reconsideration. As a result, the bank’s requirement for this year is 4.3 percent, down from a preliminary 5.1 percent.

The Board’s stress test process allows banks to request reconsideration of their stress capital buffer requirement, which is the capital requirement stemming from the stress test. A bank is required to submit a detailed explanation of why reconsideration should be granted, and the Board then conducts an independent assessment of the request.

Based on an analysis of information presented by Morgan Stanley, the Board 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. In addition, the Board determined 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.

The Board 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.

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