FED adopted a final rule that simplifies capital rules for large banks and establishes a stress capital buffer, or SCB, requirement. The final rule makes amendments to the capital rule, capital plan rule, stress test rules, and Stress Testing Policy Statement. The final rule also requires changes to the reporting forms and instructions for FR Y-9C and FR Y-14A. The rule would become effective on May 18, 2020, with the first stress capital buffer requirement of a firm effective on October 01, 2020. The final rule would apply to the Comprehensive Capital Analysis and Review (CCAR) in 2020. FED also published statements by Vice Chair for Supervision Randal K. Quarles and Governor Lael Brainard, with both stating their reasons for the support of this final rule. Additionally, FED released the instructions for the 2020 CCAR cycle. The instructions confirm that 34 banks will participate in the test this year. Results will be released by June 30.
The stress capital buffer integrates the stress test results of FED with its non-stress capital requirements. As a result, required capital levels for each firm would more closely match its risk profile and likely losses as measured via the stress tests. Under the final rule, FED 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% 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 would remove 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 final rule applies to bank holding companies and U.S. intermediate holding companies of foreign banking organizations that have USD 100 billion or more in total consolidated assets.
The total number of regulatory capital requirements applicable to large firms would be reduced from 13 to 8 under the final rule, simplifying the capital framework. In April 2018, FED invited comment on a proposal to simplify its capital framework by integrating ongoing, non-stress capital requirements and the stress test-based capital requirements under the CCAR through the establishment of a stress capital buffer requirement. The final rule includes the following changes from the proposal:
- The final rule does not include a stress leverage buffer requirement. Firms would continue to be subject to ongoing, non-stress leverage ratio requirements. This change would result in a simpler capital framework and maintain leverage capital requirements as an appropriate backstop to risk-based capital requirements.
- The final rule would allow firms to increase their planned capital distributions in excess of the amount included in their capital plans without prior approval of FED. Such firms would instead be subject to automatic distribution limitations if their capital ratios fell below the buffer requirements, which would include the stress capital buffer requirement.
- In light of the integration of non-stress capital requirements and the stress test-based capital requirements under CCAR, the final rule would revise the definition of eligible retained income in the non-stress capital requirements to make the automatic limitations on a firm’s distributions more gradual as the firm’s capital ratios decline.
- A material business plan change would generally not be incorporated into the calculation of the stress capital buffer requirement. This change would reduce the number of assumptions needed to calculate the stress capital buffer requirement.
The final rule would preserve strong capital requirements for large firms. Based on stress test data from 2013 to 2019, the draft final rule is estimated to result in largely unchanged common equity tier 1 capital requirements, on average, for firms subject to the rule. On average, the staff estimates that the rule would increase common equity tier 1 capital requirements for global systemically important bank holding companies and decrease requirements for firms subject to Category II through IV standards.
- Press Release
- Federal Register Notice
- Board Memo (PDF)
- Statement by Randal Quarles
- Statement by Lael Brainard
- CCAR 2020 Summary Instructions (PDF)
Effective Date: May 18, 2020
Keywords: Americas, US, Banking, Stress Capital Buffer, Regulatory Capital, CCAR, Stress Testing, Large Banks, Reporting, SCB, FED
Previous ArticleMNB Announces Financial Measures to Mitigate Impact of COVID-19
FCA and PRA in the UK, FED in the US, and the authorities in Singapore have fined Goldman Sachs for risk management failures in connection with the 1Malaysia Development Berhad (1MDB).
BCBS announced that OSFI and the Bank of Canada hosted the 21st International Conference of Banking Supervisors (ICBS) virtually on October 19-22, 2020.
FCA proposed guidance on how firms should continue to seek to help customers who hold insurance and premium finance products and may be in financial difficulty because of COVID-19, after October 31, 2020.
EBA issued an opinion on prudential treatment of the legacy instruments as the grandfathering period nears an end on December 31, 2021.
ESRB published the fifth issue of the EU Non-bank Financial Intermediation Risk Monitor 2020 (NBFI Monitor).
HM Treasury announced that the new Financial Services Bill has been introduced in the Parliament.
APRA announced that it has increased the minimum liquidity requirement of Bendigo and Adelaide Bank for failing to comply with the prudential standard on liquidity.
PRA published the consultation paper CP17/20 to propose changes to certain rules, supervisory statements, and statements of policy to implement elements of the Capital Requirements Directive (CRD5).
US Agencies adopted a final rule that applies to advanced approaches banking organizations and aims to reduce interconnectedness in the financial system as well as to reduce contagion risks associated with the failure of a global systemically important bank (G-SIB).
US Agencies (FDIC, FED, and OCC) adopted a final rule that implements the net stable funding ratio (NSFR) for certain large banking organizations.