Quarles says stress capital buffer could be ready for 2020 stress tests, nods to U.K. approach on countercyclical buffer

A final stress capital buffer (SCB) framework – one that may eliminate two provisions of the framework proposed in 2018 in favor of one or two other options under consideration – could be in place for the 2020 stress tests, the Federal Reserve Board’s top supervision official told a conference Thursday in Frankfurt, Germany.

One of those changes would tweak the countercyclical capital buffer (CCyB) so it’s at a positive level, much like the framework in use in the United Kingdom.

Randal Quarles, the Fed Board’s vice chair for supervision, said in a speech that he thinks a final SCB framework should omit the stress leverage buffer requirement and the requirement for banks to pre-fund the next four quarters of their planned dividend payments; both provisions were part of last year’s SCB proposal. He also suggested the Fed may propose options – setting the countercyclical capital buffer (CCyB) at a higher baseline level during normal times, and raising the floor, or the minimum level, of the SCB – to improve upon the final SCB framework.

“Of course, we will solicit public comment on potential revisions to the SCB proposal through the standard rulemaking process, and I expect that to occur in the near future,” Quarles said. “I further expect that we will maintain the basic framework of the SCB while also incorporating some additional refinements, such as to address volatility and provide better notice for firms in planning their capital actions.”

Regarding the CCyB, Quarles he supports integrating the CCyB is more closely into the overall capital framework to allow a “greater scope for dynamic adjustments.” He again noted his interest in the U.K. model.

“While the Board has maintained the CCyB at zero since 2016, other countries have adjusted their countercyclical buffers in response to vulnerabilities within their financial sectors or, in the case of the United Kingdom, to integrate its CCyB with its structural capital requirements,” he said. “For example, I find the U.K. framework, adopted by their Financial Policy Committee, to be quite compelling. Specifically, under the British framework, the CCyB would equal a positive amount—in the British case it’s 1 percent—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.”

The Fed’s proposed SCB framework, issued for comment last April, would integrate the board’s regulatory capital rule and the Comprehensive Capital Analysis and Review (CCAR) and stress test rules in an effort to simplify the capital regime for firms subject to the capital plan rule. It would revise the Fed Board’s capital plan rule, capital rule, and stress testing rules and would amend the Fed’s stress testing policy statement.

Quarles, speaking Thursday, said the Fed’s goals “remain to simplify our capital framework while maintaining the overall amount of capital in the U.S. banking system.” He said the refinements being considered for the SCB framework would also “improve the efficiency, coherence, and transparency of the regulatory capital framework and the core principles of our stress testing program that have proven successful.”

“Refining the Stress Capital Buffer,” speech by Fed Vice Chair for Supervision Randal K. Quarles at Program on International Financial Systems Conference, Frankfurt, Germany

2018 proposed rule

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