The Federal Reserve is planning to adjust the CCAR stress test rules. Goldman Sachs: The seven major banks are expected to release $17 billion in capital dividends.

On April 17, the Federal Reserve proposed three changes to the Comprehensive Capital Analysis and Review (CCAR) stress tests. Goldman Sachs' latest research report pointed out that the new rules are expected to release capital dividends, with the SCB of the top 7 banks on average dropping by 20 basis points, releasing approximately $17 billion in excess capital. The three proposals put forward by the Federal Reserve include: 1) averaging stress capital buffer (SCB) over two years, meaning for 2025, it will be based on the average of 2024 and 2025 SCB results; 2) pushing back the effective date of SCB from October 1 to January 1 of the following year, giving banks an additional 3 months to address any unexpected increase in SCB; 3) conducting additional data collection to inform future CCAR proposals, which will undergo stress tests later this year. Although the proposal considers implementing average SCB from 2025 onwards, it also raises the question of whether the averaging should be delayed by a year. This proposal is clearly a positive step towards better regulatory capital outcomes for large banks. According to Goldman Sachs' calculations, with the averaging of the most recent two years' SCB (2023/24), the SCB of the top 7 banks on average dropped by 20 basis points, creating a total of $17 billion in excess capital (bringing total excess capital to $68 billion), equivalent to an additional 1 percentage point of total market capital. This will increase total excess capital to 3-4% of total market capital. If the excess portion is repurchased at current prices, it would represent an upside potential of 1% in earnings per share. Based on Goldman Sachs' calculations, if the average of 2023/24 SCB is used instead of the 2024 value, the Return on Tangible Common Equity (ROTC) of the top seven banks would increase by 20 basis points, provided that the banks return this excess capital through repurchases. The proposal plans to implement a two-year average method in 2025, but also asks whether it should be delayed until 2026, adding uncertainty to capital requirements. Since the finalization of the rules may be pushed back to July 2025 or later, banks face significant uncertainty in their capital planning for 2025. Banks must simultaneously address three potential capital requirements: 1) if the averaging is delayed to 2026 or later, banks need to determine SCB based directly on the 2025 CCAR results; 2) if the averaging is implemented according to the 2025 proposal, banks need to manage the average of 2024 and 2025 SCB; 3) if the final rule differs from the proposal, banks also need to address another set of capital requirements. Goldman Sachs points out that this uncertainty may lead banks to adopt a more conservative capital return strategy in 2025, especially in the third quarter.