Federal Reserve Board Requests Comments on Proposal to Simplify Capital Rules for Large Banks

On April 10, 2018, the Federal Reserve Board officially invited public comment on a Notice of Proposed Rulemaking which seeks to simplify capital rules for large banks by introducing a “stress capital buffer” (SCB)—the proposed rulemaking would combine the quantitative assessment of the Board’s Comprehensive Capital Analysis and Review (CCAR) program with the “non-stress” buffer requirements listed in the Board’s regulatory capital rule.  The proposal would: (1) amend the Board’s capital plan rule, regulatory capital rule, and stress testing rules; (2) amend the Stress Testing Policy Statement that was proposed for public comment on December 15, 2017; and (3) make related changes to regulatory reports.  If the proposal is finalized as proposed, it would become effective on December 31, 2018, and a firm’s first SCB and stress leverage buffer requirements generally would be effective on October 1, 2019.

This proposal was developed in light of feedback the Board received in response to an earlier request for comments on a trio of proposals—including the aforementioned Stress Testing Policy Statement—which were aimed at increasing the transparency of the Board’s bank stress testing program.  In order to solve some of issues highlighted by those comments, the proposal aims to enhance the efficiency of the Board’s capital regime by merging the existing stress testing and capital rules without sacrificing either regulation’s primary objectives.  The proposal includes: (1) that an SCB requirement would be added to any applicable surcharge on a United States firm identified as a global systemically important bank holding company (GSIB) and any applicable countercyclical capital buffer amount to establish a firm’s capital conservation buffer requirement; and (2) a stress leverage buffer requirement to maintain the current complementary relationship between the risk-based and leverage capital requirements.

As part of the integration of the capital plan rule and the regulatory capital rule, the proposal generally would, among other things:

• Use the Board’s supervisory stress test to establish the size of an SCB requirement which would apply to a firm under the capital rule;
• Replace the existing 2.5% of risk-weighted assets portion of the capital conservation buffer requirement under the standardized approach of the capital rule with the proposed SCB requirement;
• Revise the capital rule to: (i) introduce the terms “stress capital buffer requirement” and “stress leverage buffer requirement,” and (ii) define “standardized approach capital conservation buffer” requirement and “advanced approaches capital conservation buffer” requirement for firms subject to the capital plan rule;
• Allow firms to determine: (i) their standardized approach capital conservation buffer using risk-based capital ratios calculated under the capital rule’s standardized approach, and (ii) if applicable, their advanced approaches capital conservation buffer using risk-based capital ratios calculated under the capital rule’s advanced approaches;
• Eliminate the provisions in the current capital plan rule whereby the Board may object on quantitative grounds to a firm’s capital plan;
• Still require firms subject to the capital plan rule to submit a capital plan and adhere to the planned capital distributions in such plan;
• Modify the Consolidated Financial Statements for Holding Companies Report to collect information regarding the stress buffer requirements applicable to a firm and the Capital Assessments and Stress Testing Report;
• Narrow the set of planned capital actions (e.g., dividends, repurchases, and issuances of regulatory capital instruments) which are assumed to occur in the supervisory stress test, as part of the CCAR post-stress capital assessment;
• Modify CCAR’s current assumption that a firm’s balance sheet grows under stress, and instead assume that a firm has taken reasonable actions to preserve its resources such that it will maintain a consistent level of assets “over the planning horizon;” and
• Eliminate the 30% dividend payout ratio as a “criterion for heightened scrutiny” during assessments of a firm’s capital plan, and instead include “four quarters of planned common stock dividends” in a firm’s stress buffer requirements in order to provide a “sufficient incentive for prudent dividend payouts.”

The proposal would apply to bank holding companies with $50 billion or more in total consolidated assets and United States intermediate holding companies of foreign banking organizations established pursuant to the Board’s Regulation YY.  It would not apply to any community bank, bank holding company with total consolidated assets of less than $50 billion, or state member bank or savings and loan holding company.  Comments on the proposal must be received by a date that is 60 days after the date of the proposal’s publication in the Federal Register.