Morgan Stanley expects its regulatory capital requirements to remain roughly the same or possibly decline modestly under the U.S. Federal Reserve's proposed overhaul of capital rules, Chief Financial Officer Sharon Yeshaya told Reuters. The comments reflect a positive outcome for a bank that has actively advocated for changes to the post-crisis regulatory regime.
The Federal Reserve said last month that, under softened drafts of the Basel III and global systemically important bank (GSIB) surcharge rules it released, capital levels for large banks should fall. Regulators estimate those changes could free up billions of dollars for activities such as lending, dividend payments and share buybacks, and investors are beginning to assess the consequences for the capital cushions banks maintain to absorb possible losses.
Yeshaya, speaking after the bank's earnings release, said: "We expect, or would think that right now, we'd be neutral to modestly positive in terms of a capital release. But the exact math of that will really depend on certain clarifications and what comes out of the final model proposals."
She noted that while the proposed Basel draft would increase Morgan Stanley's risk-weighted assets, revisions to the GSIB surcharge would produce a net benefit. Specifically, the GSIB buffer would fall from 3.5% to around 2.2%, a shift Yeshaya described as "noticeably positive."
Reuters reported previously that a change in the treatment of short-term wholesale funding under the GSIB surcharge should be advantageous for Morgan Stanley and for rival Goldman Sachs. Beyond the mechanics of specific rules, Yeshaya said the Fed's decision to consider capital requirements holistically - including the annual supervisory stress testing process - "is something that has helped us."
The bank reported better-than-expected first-quarter results on Wednesday. Morgan Stanley benefited from a surge in dealmaking and recorded its highest-ever revenue from its equities trading business, with the beats on profit and trading revenue pushing the stock approximately 6% higher. Yeshaya also told investors on the earnings call that a recent revision to another key leverage ratio rule contributed to the improved results.
Lobbying and engagement with regulators
The capital rule changes come after a sustained push by large Wall Street banks to ease requirements imposed after the 2008 financial crisis, a campaign that argues those rules are overly strict and impede lending and economic activity. The Fed's capital overhaul is led by Vice Chair for Supervision Michelle Bowman and represents the culmination of that multiyear effort.
Yeshaya, who became CFO in 2021 after heading investor relations, has been deeply involved in the bank's regulatory outreach, according to public records. Morgan Stanley spent $5 million on lobbying in 2024 - the highest amount the firm has recorded in a single year, according to transparency group records cited in public filings.
Federal Reserve meeting records show that Yeshaya, often accompanied by other Morgan Stanley executives, met at least a dozen times with central bank governors Michelle Bowman, Christopher Waller and Jerome Powell, along with Fed staff, since Governor Michael Barr unveiled the original proposals in 2023. Those 2023 proposals initially envisaged double-digit capital increases. During the meetings, Yeshaya and colleagues discussed Basel-specific issues, how wholesale funding affects the GSIB surcharge, interactions among the various capital measures, and the Fed's annual stress test process, the records indicate.
Yeshaya also participated in a capital conference convened by Bowman last year. Her involvement in those engagements, combined with the Fed's adjusted approach to rulemaking, helps explain why Morgan Stanley expects to see at least neutral if not modestly positive capital impacts from the revisions.
Background on Yeshaya and next steps
Yeshaya's career at Morgan Stanley spans 25 years, beginning with a summer internship in 2000. Within the firm she is regarded as highly knowledgeable on capital rules and, according to internal views cited publicly, is seen by some as a possible future CEO candidate.
On the earnings call she said banks will continue to provide feedback to regulators and that further adjustments may occur, but cautioned that "not everyone’s going to get everything they want." The final effect on any individual bank will depend on clarifications and details that emerge as the rulemaking process proceeds and the Fed issues final model proposals.