The Federal Reserve Board will consider exempting firms with less than $250 billion in assets from comprehensive capital analysis and review (CCAR) quantitative assessment and supervisory stress testing in 2019, the board’s top supervisory regulator said Friday.
In a speech, Federal Reserve Board Vice Chairman for Supervision Randal Quarles said he expects the Fed Board will adopt a final rule in the near future, settling the basic stress capital buffer (SCB) framework while re-proposing certain elements. He said the first SCB from the Federal Reserve won’t go into effect until 2020, and comprehensive capital analysis and review (CCAR) will stay in place next year.
However, Quarles said, he would ask the board for the exemptions, and will consider whether the Fed can move forward with any aspects of the SCB proposal for CCAR 2019, such as assumptions related to balance sheet growth.
In his remarks to a symposium on “An International Perspective on the Future of Bank Stress Testing,” at Harvard Law School in Cambridge, Mass., Quarles focused on three areas in the SCB proposal that he said could “could benefit from further refinement.”
“Foremost among these is the volatility of stress test results,” he said. Quarles acknowledged that some volatility in annual results is necessary to preserve the dynamism of the stress test and changes in the economy and other areas. However, he said, a highly variable capital requirement from year to year “can present a significant management challenge,” particularly when the largest banks in the system are fully meeting their capital requirements.
“I believe there is an important balance to strike in this area, which will let us preserve dynamism while reducing volatility, and we plan to seek comment on a relevant proposal in the not-too-distant future,” he said.
Second, Quarles said, is sequencing of stress test results with capital plan submissions. Firms have told the Fed, he said, that they would be able to “engage in more thoughtful capital planning if they had knowledge of that year’s stress test results before finalizing their distribution plans for the upcoming year.”
“I am sympathetic to their concerns, and will ask the Board to adjust the operation of the rule, so that firms know their SCB before they decide on their planned distributions for the coming year,” he said.
Finally, the Fed vice chairman for supervision said, he is concerned that explicitly assigning a leverage buffer requirement to a firm on the basis of risk-sensitive, post-stress estimates runs counter to the assumptions of the leverage ratio. “I would advocate removing this element of the stress capital buffer regime,” he said.
He added that leverage ratios, including the enhanced supplementary leverage requirements, would remain a critical part of the Fed’s regulatory capital regime. “We will maintain the supervisory expectation that firms have sufficient capital to meet all minimum regulatory requirements,” he said.
Speech by Vice Chairman for Supervision Quarles on beginning stress testing’s new chapter