DFAST 2024: IHCs outperform US banks despite steeper CET1 ratio decline

US subsidiaries of Deutsche Bank, UBS and RBC lead intermediate holding companies in biggest capital requirement drops

The intermediate holding companies (IHCs) of the eight foreign banks participating in this year’s Dodd-Frank Act stress test (DFAST) experienced a more significant decline in capital ratios compared to their 23 domestic counterparts.

The median IHC’s stressed Common Equity Tier 1 capital ratio dropped by 5.3 percentage points over the nine-quarter stress scenario. In contrast, the median US bank’s CET1 capital ratio fell by 2.5pp, less than half as much. Despite the steeper decline, the median IHC’s low point of 9.8% still exceeded the median US bank’s figure of 8.5%.

 

The three banks with the largest declines were all foreign-owned: Deutsche Bank USA’s ratio plunged by 13.3pp, UBS Americas’ by 9.3pp and Royal Bank of Canada US’s by 6.3pp.

Other metrics tested by DFAST revealed a similar trend. The median IHC’s Tier 1 leverage ratio declined 3.3pp, compared to 1.9pp for domestic banks. However, unlike with CET1 ratios, the median IHC’s low point of 5.9% was below the corresponding US bank’s 6.8%.

RBC US saw a decline of 4.7pp, followed by BMO US and Deutsche Bank USA, each falling 4.2pp.

 

For the supplementary leverage ratio (SLR), the median IHC’s ratio across the five banks stressed on this metric declined by 3.6pp, while US banks saw a drop of 1.4pp. Similarly to the Tier 1 leverage ratio, the SLR for the median IHC dipped lower than that of the median US bank, reaching 4.5% compared to 5.6%.

Deutsche Bank USA led with a 3.7pp decrease, closely followed by BMO US, UBS Americas and Capital One, each with a 3.6pp drop.

What is it?

The Dodd-Frank Act stress tests, now in their 12th year, evaluate the resilience of the largest US banks against hypothetical economic shocks to prepare for potential financial crises. The 2024 test spans 31 banks, including eight intermediate holding companies. Last year, 23 banks underwent this process since smaller institutions are only required to participate biennially.

The Federal Reserve devised a baseline and a severely adverse scenario to test the banks over a 13-quarter horizon, from Q1 2024 to Q1 2027, with a stressed period lasting nine quarters. Throughout this period, banks must maintain sufficient capital levels.

Banks use their models to estimate the impact of the Fed’s stress scenarios on their capital reserves, while the central bank conducts its assessment using its models. To pass the tests, banks must maintain capital ratios, as estimated by the Fed, above the regulatory minimum of 4.5%. Failure to do so triggers automatic restrictions on capital distributions and discretionary bonus payments.

Why it matters

Although the US units of foreign institutions experienced larger declines in their stressed ratios than their US peers, they did so from a higher starting point. For instance, the baseline CET1 capital ratio for the median IHC was 14.7%, compared to 11.3% for the median domestic bank. This explains why, at least for this metric, the larger drop did not result in the IHCs underperforming the US banks.

This was a function of the former having higher stress capital buffers (SCBs) baked into their capital requirements. While the median US bank had an SCB of 2.5%, the median IHC had an SCB of 4.5%. The largest SCBs in the entire sample were at Deutsche Bank USA (9.3%), UBS Americas (9.1%) and HSBC North America (6.4%) and had been determined by their performance in last year’s stress test.

Given the substantial hits to their CET1 capital ratios in this year too, IHCs are likely to face high SCBs again, meaning they will continue to be required to hold substantial capital buffers.

Explore our data

Readers of Risk Quantum now have access to some of the datasets that sit behind our stories – not just the segment of data that is the focus for the story, but the full time series, for the full population of covered firms. Readers can choose the institutions they want to look at, the metrics they are interested in, and download the data in CSV format to run their own comparisons and build their own charts. Risk and capital managers told us it would be helpful for internal reporting and benchmarking, but we figured many of our readers might get something out of it.

Currently, the available data covers more than 120 banks and over 350 metrics, but we’ll be adding more throughout the year. The Risk Quantum database can be accessed here. The full list of data points currently available can be found at this page. The full range of banks covered can be viewed here.

Get in touch

Like Risk Quantum? Sign up for free to our daily newsletter and check @RiskQuantum for the latest updates.

If you have any thoughts on our latest analysis or want to suggest other ways to present and analyse the data, you can email us.

Tell me more

HSBC North America breached leverage ratio minimum in latest DFAST

Eleven banks fall below buffer requirements in latest DFAST

Foreign banks perform better in 2021 Fed stress tests

Eight US banks slapped with higher capital buffers

View all regulator stories