Featured Product

    Randal Quarles of FED on Refining Stress Capital Buffer Framework

    September 05, 2019

    Randal K. Quarles of FED spoke at the Program on International Financial Systems Conference in Germany. As FED has been considering refinements to the stress testing and capital frameworks, he highlighted that two goals have been at the forefront—to simplify these frameworks to make them easier to apply and understand and to maintain the overall high level of loss-absorbing capacity in the banking system. Last year, FED had issued a proposal on the stress capital buffer (SCB) to simplify regulatory regime by integrating the stress test with the non-stress capital rules. Instead of finalizing the SCB for the 2019 stress test cycle as planned earlier, the SCB framework is now expected to be in place for the 2020 stress tests.

    For large bank holding companies, SCB would replace the fixed-for-all-times-and-for-all-banks 2.5% risk-based capital buffer with a firm-specific buffer based on the most recent stress test results of a firm. This would integrate the stress testing capital requirements with the point-in-time capital requirements. Based on the feedback to the proposal, Mr. Quarles emphasized on two elements of the proposal that he believes should not be a part of the final framework. One of these elements is the requirement for stress leverage buffer and the second element is the requirement for banks to pre-fund the next four quarters of their planned dividend payments. The stress tests currently require banks to set aside sufficient capital to "pre-fund" expected capital distributions, both dividends and repurchases, for all nine quarters of the capital planning horizon. Removing the pre-funding of dividend requirement would simplify the SCB proposal, said Mr. Quarles. 

    As an alternative to requiring pre-funding dividends and in furtherance of the other goals, he suggested two co-equal options that would simplify capital requirements while limiting procyclicality. These two options are consistent with the goal of maintaining the overall levels of capital in the banking system—to set the countercyclical capital buffer (CCyB) at a higher baseline level during normal times and to raise the "floor," or the minimum level, of stress capital buffer. While FED has maintained the CCyB at zero since 2016, other countries have adjusted their CCyB in response to vulnerabilities in their financial sectors or, in the case of the UK, to integrate the CCyB with its structural capital requirements. Under the British framework, the CCyB would equal a positive amount in standard risk conditions. The effect of the policy is that the buffer can be varied in line with the changing risks that the banking system faces over time. He highlighted that the application of the UK approach in the United States could provide a flexible mechanism that could complement other modifications to the SCB framework and allow FED to adjust capital requirements as financial risks are evolving. 

    Mr. Quarles mentioned another equally viable alternative to turning on the CCyB, which involves raising the proposed SCB floor from the fixed 2.5% of risk-weighted assets to a somewhat higher level. This approach would have three significant benefits compared to the CCyB option: greater simplicity, transparency, and predictability. However, the higher fixed floor option has some drawbacks as well. For firms whose losses are typically close to the existing 2.5% floor, this change will affect them more than others and produce a capital regime with slightly less risk-sensitivity. In terms of targeting procyclicality, this approach would be much less direct, as opposed to more actively managing the level of the CCyB. 

    Before finalizing the SCB framework, FED plans to solicit public comment on potential revisions to the SCB proposal from last year, through the standard rule-making process, and this consultation is expected to be launched "in the near future." Mr. Quarles expects that the FED will maintain the basic SCB framework while incorporating some additional refinements, such as to address volatility and provide better notice for firms in planning their capital actions. He concluded that the refinements that are being considered to the SCB framework would improve the efficiency, coherence, and transparency of the regulatory capital framework and the core principles of the stress testing program (that have proven to be successful). 

     

    Related Link: Speech

     

    Keywords: Americas, US, Banking, Stress Testing, CCyB, Stress Capital Buffer, Regulatory Capital, Loss-Absorbing Capacity, Financial Stability, FED

    Featured Experts
    Related Articles
    News

    APRA Announces Deferral of Capital Reform Implementation

    APRA announced that it is deferring the scheduled implementation of Basel III reforms in Australia by one year.

    March 30, 2020 WebPage Regulatory News
    News

    IFRS Publishes Statement on Its Work During the COVID-19 Crisis

    IFRS, in its statement, emphasized that it shares global concerns about the impact of COVID–19 and is supporting its stakeholders by reconsidering timelines of its meetings and publications, providing information on the application of IFRS 9 on financial instruments, and offering calendar updates on ongoing activities.

    March 27, 2020 WebPage Regulatory News
    News

    US Agencies Announce Changes to SA-CCR and CECL Rules Due to COVID-19

    In light of the recent disruptions in economic conditions due to the COVID-19 outbreak, US Agencies (FDIC, FED, and OCC) announced two actions to allow banking organizations to continue lending to households and businesses.

    March 27, 2020 WebPage Regulatory News
    News

    IAIS Adjusts Work Program to Address Impact of COVID-19 on Insurers

    Considering the impact of COVID-19 outbreak, IAIS announced initial adjustments to its work program to provide operational relief to its member supervisors, insurers, and other stakeholders.

    March 27, 2020 WebPage Regulatory News
    News

    OSFI Announces Regulatory Adjustments to Support COVID-19 Efforts

    OSFI published three targeted industry letters that announce a series of regulatory adjustments to support the financial and operational resilience of federally regulated banks, insurers, and private pension plans in the light of COVID-19.

    March 27, 2020 WebPage Regulatory News
    News

    UK Regulators Announce Measures to Address Impact of COVID-19

    UK Regulatory Authorities published statements and guidance addressed to financial entities on dealing with the impact of the coronavirus (COVID-19) outbreak.

    March 26, 2020 WebPage Regulatory News
    News

    ISDA and Industry Request Delay in Timeline for Initial Margin Rules

    Considering the challenges posed by the COVID-19 pandemic, ISDA submitted a letter on behalf of 21 industry associations and their members requesting BCBS, IOSCO, and global regulators to suspend the current timeline for the initial margin phase-in.

    March 26, 2020 WebPage Regulatory News
    News

    FCA, FRC, and PRA Issue Joint Statement to Address Impact of COVID-19

    In response to the COVID-19 outbreak, FCA, the Financial Reporting Council (FRC), and PRA have announced a series of actions and made statements to support the continued functioning of capital markets in the UK.

    March 26, 2020 WebPage Regulatory News
    News

    EC Rule Corrects Regulation Supplementing Solvency II Directive

    EC published the EU Delegated Regulation 2020/442, which corrects the EU Delegated Regulation 2015/35 that supplements Solvency II Directive (2009/138/EC).

    March 26, 2020 WebPage Regulatory News
    News

    FED and FFIEC Offer Reporting Relief to Institutions Due to COVID-19

    FED and FFIEC announced regulatory reporting relief to financial institutions due to disruptions caused by the COVID-19.

    March 26, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 4900