On April 10, 2018, the Federal Reserve published a notice of proposed rulemaking and request for comment intended to integrate its capital and stress rules and thereby simplify the capital regime applicable to bank holding companies with $50 billion or more in total consolidated assets and to the U.S. intermediate holding companies of foreign banking organizations. Currently, the standardized approach imposes a static capital conservation buffer of 2.5% of risk-weighted assets. The proposal would replace that with a stress capital buffer equal to the decrease in common equity Tier 1 capital under the severely adverse stress testing scenario plus four quarters of common stock dividends (expressed as a percentage of risk-weighted assets).
The stress capital buffer for an institution, however, cannot be lower than 2.5 percent of an institution's risk-weighted assets. This buffer would apply in addition to the surcharge applicable to GSIB holding companies that are subject to the Federal Reserve's GSIB surcharge, and any applicable countercyclical capital buffer amount. The proposal is intended to streamline the existing regulatory capital regime and would result in a reduction of the total number of requirements applicable to the largest bank holding companies from 24 to 14, while maintaining the overarching objectives of stress testing and capital rules. Failure to maintain the minimums subjects a firm to restrictions on capital distributions and discretionary bonus payments.
The proposal would also create a stress leverage buffer requirement that would be based upon certain capital action assumptions currently used in the Comprehensive Capital Analysis and Review program's supervisory post-stress capital assessment. The proposal seeks to make a number of changes to the Federal Reserve Board's CCAR program itself, as well. This includes replacing the assumption that a firm will carry out all nine quarters of its planned capital actions, with a requirement that firms fund four quarters of common stock dividends; replacing an assumption that results in a firm's balance sheet growing under stress with one that requires that it remain constant; removing the 30 percent dividend ratio that has been used as a threshold for heightened supervisory scrutiny; and eliminating the quantitative objection (i.e., under current rules the Federal Reserve may restrict capital distributions if a firm does not demonstrate an ability to maintain capital levels above minimums under stressful conditions). The proposal notes that had these amendments been in effect during the most recent CCAR exercises, and given the current capital levels of participating firms, no firm would have been required to raise additional capital to avoid limitations on capital distributions. In addition, Federal Reserve Board staff expects the changes to reduce the amount of capital required of non-GSIBs that are subject to CCAR and maintain, or slightly increase, the capital required for GSIBs. Comments on the proposal are due 60 days from the date the notice is published in the Federal Register.
The full text of the proposed rule is available at: https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20180410a2.pdf?_sm_au_=iVVpJHbpFfNfr7D7.
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