By Nicole D. Prysby, J.D.
The Fed’s final rule, which integrates the regulatory capital rule with CCAR, amends the capital rule, capital plan rule, stress test rules, and Stress Testing Policy Statement.
The Federal Reserve Board has approved a final rule that simplifies the capital rules for large banks. Under the new rule, the Board will use the results of its supervisory stress test to establish the size of a firm’s stress capital buffer requirement. Through the integration of the capital rule and the Comprehensive Capital Analysis and Review (CCAR) process, the final rule will remove redundant elements of the current capital and stress testing frameworks. The announcement was followed by a statement in support of the rule from Board Vice Chair for Supervision Randal Quarles and statements in opposition from Board Governor Lael Brainard and the Center for American Progress. The Board also released the latest CCAR instructions. The final rule takes effect 60 days after its publication in the Federal Register, with "a firm’s first stress capital buffer requirement, as determined under the final rule, effective October 1, 2020."
On March 4, 2020, the Board announced that it approved a rule simplifying capital rules for large banks. The stress capital buffer (SCB), integrates the Board’s stress test results with its non-stress capital requirements. The rule is broadly similar to the proposal from April 2018, with a few changes in response to comments. The Board’s announcement states that the SCB framework preserves the strong capital requirements established after the financial crisis.
The final rule (Docket R-1603, RIN 7100–AF02) integrates the Board’s regulatory capital rule with the CCAR process, as implemented through the Board’s capital plan rule. The final rule makes amendments to the capital rule, capital plan rule, stress test rules, and Stress Testing Policy Statement. Under the final rule, the Board will use the results of its supervisory stress test to establish the size of a firm’s stress capital buffer requirement, which replaces the static 2.5 percent of risk-weighted assets component of a firm’s capital conservation buffer requirement. Through the integration of the capital rule and CCAR, the final rule removes redundant elements of the current capital and stress testing frameworks that currently operate in parallel rather than together, including the CCAR quantitative objection and the assumption that a firm makes all capital actions under stress. The simplification would result in banks needing to meet eight capital requirements, instead of the current 13. The final rule applies to bank holding companies and U.S. intermediate holding companies of foreign banking organizations that have $100 billion or more in total consolidated assets.
In a February 2020 press release, Board staff requested approval of the final rule. In the memo requesting approval, the staff noted some changes from the draft rule. For example, the final rule does not include a stress leverage buffer requirement.
Board Vice Chair for Supervision Randal Quarles issued a press release about the rule, stating that it "materially simplifies the post-crisis capital framework for banks, while maintaining the strong capital requirements that are the hallmark of that framework."
Board Governor Lael Brainard issued a statement opposing portions of the new rule. She explained that she supports integrating the non-stress capital rules and the stress-test based capital requirements into a single framework, but that the rule allows for too great a reduction in banks’ capital buffers. For example, the rule will reduce current tier 1 capital requirements by nearly $40 billion for the global systemically important banks, nearly $30 billion for other large banks with assets above $250 billion, and nearly $35 billion for banks with assets between $100 and $250 billion. The Center for American Progress also issued a statement opposing the rule, arguing that it will severely weaken the capital framework for banks, and prioritizes shareholder and executive payouts over stability of the banking system.
The Board also released the Comprehensive Capital Analysis and Review (CCAR) 2020 Summary Instructions. The CCAR instructions incorporate the final rule establishing the firm specific SCB requirement and also incorporate the Board’s October 2019 tailoring rule that established a revised framework for determining prudential standards for large domestic and foreign banks.
Companies: Center for American Progress
MainStory: TopStory BankHolding BankingFinance BankingOperations CapitalBaselAccords FederalReserveSystem FedTracker FinancialStability PrudentialRegulation
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