FED Simplifies Capital Rules, Finalizes Stress Capital Buffer Proposal

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. 

Related Links

• 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