The largest and most complex US banks have mostly been able to keep their regulatory risk scores in check as they try to keep capital buffer requirements from rising further.

Risk scores, which determine capital surcharges for the eight US global systemically important banks (G-SIBs), increased sequentially in the first quarter, but not by enough to push most of the big banks into a higher capital surcharge bucket, according to S&P Global Market Intelligence data. Goldman Sachs Group Inc. was the lone exception.

Through most of 2022, Goldman had been on track for a 3.5% surcharge starting in 2024 but managed to cut that to 3.0% by the end of the year. Changes to Goldman's risk score in the first quarter of 2023 put it back on pace for a 3.5% surcharge. The bank will likely take steps to mitigate the impact of those changes, Jefferies analysts said in a June 28 note.

A widespread effort to arrest an upward migration in capital surcharges comes after recent and scheduled increases at Goldman, JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. Big banks are also bracing for tougher capital standards from different rule changes that regulators said they will propose soon, though several are set for some relief on buffers determined by a strong performance in this year's stress test.

Controlling complexity

The risk scores are used to gauge factors like size and exposure to derivatives and foreign counterparties. Current surcharges are keyed to scores as of the end of the year three years prior, though banks have the ability to move into lower surcharge buckets by reducing their risk scores.

Combined with a 4.5% Tier 1 common equity (CET1) minimum and the stress capital buffers (SCBs) determined by the stress tests, risk scores make up effective CET1 minimums for the G-SIBs. There is also the possibility of an additional countercyclical capital buffer, which has not yet been implemented in the US.

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Across the US G-SIBs, risk scores increased 197 points sequentially in the first quarter to 4,307. This included minimal increases at Wells Fargo & Co. and State Street Corp. and a slight decline at the Bank of New York Mellon Corp.

Banks tend to manage down risk scores for the year-end measurement, however. Risk scores were down 126 points year over year across the US G-SIBs. That included a drop in short-term wholesale funding exposure of 67 points, a drop in the measure for foreign activity of 24 points, and an increase of only 4 points in the measure for complexity, which includes exposure to derivatives and hard-to-value assets.

Risk-weighted asset diet

The US G-SIBs have also been working to keep capital needs in check by slowing the growth of risk-weighted assets (RWAs), which are used in the calculation of CET1 ratios. Across the group, RWAs increased 0.3% sequentially in the first quarter, compared with a 2.7% increase in total assets.

Combined with the prospective reduction in JPMorgan Chase's SCB from this year's stress test, the supplementary leverage ratio (SLR) — which measures Tier 1 capital as a percentage of on- and off-balance sheet exposures without risk weightings — has become the bank's "binding constraint," the Jefferies analysts calculated. That means JPMorgan Chase has the smallest amount of excess capital under that measure than alternative requirements. Regulators had given banks temporary relief on SLR requirements during the pandemic as balance sheets ballooned with liquidity.

Across the US GSIBs, SLRs increased by a median 7 basis points sequentially in the first quarter, including an increase of 25 basis points at JPMorgan Chase.