Banking and Finance Law Daily Wrap Up, FINANCIAL STABILITY—Fed reconsiders, modifies Morgan Stanley's ‘stress capital buffer’ requirement, (Oct 1, 2025)

By Thomas G. Wolfe, J.D.

After Morgan Stanley asked the Fed to reconsider its preliminary pegging of the stress capital buffer for the bank, the Fed conducted further analysis and decided to adjust the SCB requirement.

The Board of Governors of the Federal Reserve System has decided to modify Morgan Stanley's stress capital buffer (SCB) requirement, reducing it from 5.1 percent to 4.3 percent, effective Oct. 1, 2025. The Fed’s decision follows the bank’s formal request for the agency to reconsider its preliminary SCB requirement for the firm.

Backdrop. In July 2025, The Federal Reserve’s annual stress test found that all 22 major U.S. banks remained well capitalized and capable of lending even during a severe recession scenario. Among other things, the annual stress test projected over $550 billion in hypothetical losses, yet major banks stayed above the minimum capital requirements (see Banking and Finance Law Daily, July 11, 2025). In late August, the Fed published its final individual capital requirements for these large banks (see Banking and Finance Law Daily, Sept. 2, 2025).

However, in connection with Morgan Stanley, the Fed’s August report stated (in a footnote) that the individual capital requirements “do not include a stress capital buffer requirement for Morgan Stanley, as the firm requested reconsideration to reduce this requirement.” The Fed explained that it would review the bank’s request to reduce the SCB requirement and expected to make its decision on Morgan Stanley’s final individual capital requirements by Sept. 30, 2025.

Fed’s analysis. Based on its analysis of information presented by Morgan Stanley, the Fed determined that “estimated losses in the bank's fair value option loan portfolio were too conservative.” According to the agency, this was partly due to the “unique composition of the bank's loan portfolio.” In addition, the Fed used Morgan Stanley’s “second largest counterparty when measuring counterparty losses associated with default of the largest counterparty” because doing so “would be more consistent with the Board's treatment of similar counterparties.”

Barr’s statement. Federal Reserve Board Governor Michael Barr commented that he supports the modified capital requirement for Morgan Stanley, noting that it is consistent with his 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,” he added.

Morgan Stanley’s statement. Morgan Stanley’s Executive Vice President and Chief Financial Officer, Sharon Yeshaya, said the firm “appreciates the Federal Reserve’s careful reconsideration of our 2025 CCAR results. We look forward to continued constructive engagement with the Federal Reserve on the stress testing framework.”

Companies: Morgan Stanley

RegulatoryActivity: BankHolding BankingOperations CapitalBaselAccords FederalReserveSystem FinancialStability PrudentialRegulation SecuritiesDerivatives