Fed sets final rule for ‘stress capital buffer,’ issues 2020 CCAR instructions; Brainard dissents

A final rule that creates a stress capital buffer (SCB) integrating the Fed’s stress test results with its non-stress capital requirements was approved Wednesday by the board, which also released instructions for the 2020 comprehensive capital analysis and review (CCAR) cycle.

The Fed said that under the final rule, required capital levels for each firm would more closely match the firm’s risk profile and likely losses as measured through the board’s stress tests. It said the rule is “broadly” similar to the April 2018 proposal, with some changes in response to comments. For example, the final rule the final rule does not include a stress leverage buffer.

“The stress capital buffer materially simplifies the post-crisis capital framework for banks, while maintaining the strong capital requirements that are the hallmark of the framework,” Vice Chair for Supervision Randal K. Quarles said.

The SCB uses the results from the board’s supervisory stress tests, which are one component of the annual (CCAR), to help determine each firm’s capital requirements for the coming year. The Fed said the final rule simplifies capital rules for large banks, which now will need to meet eight capital requirements instead of the current 13.

This final rule puts the SCB in place in time for the 2020 stress tests, which are required for 34 large banking firms. Firms will have until April 6 to submit stress-test results to the Fed.

The Fed Board was not unanimous in its approval of the final rule: Fed Gov. Lael Brainard, in a statement, said she was an early proponent of the SCB and supported integrating the non-stress capital rules and the stress-test based capital requirements into a single framework “that preserves capital neutrality.” But she said this final rule “gives a green light for large banks to reduce their capital buffers materially, at a time when payouts have already exceeded earnings for several years on average.”

According to Brainard, Wednesday’s SCB rule will reduce current required tier 1 capital by roughly $100 billion, or 7% percent, for large banks overall. (Of that, according to a footnote, nearly $40 billion is a reduction in tier 1 capital for global systemically important banks, or GSIBs.) She said the rule also will reduce current required common equity tier 1 (CET1) capital by $60 billion, or 5%, and “could be expected to reduce current actual CET1 capital by $120 billion or 10 percent overall.”

“Banks worked hard to build their capital buffers following the crisis,” she said in the statement. “It is imprudent to reduce the loss absorbing capital at the core of the system at this point in the cycle, when large banks are internationally competitive, and payouts have been exceeding earnings.”

The final rule makes amendments to the capital rule, capital plan rule, stress test rules, and Stress Testing Policy Statement. It takes effect 60 days after publication in the Federal Register, with a firm’s first SCB requirement, as determined under the final rule, effective Oct. 1, 2020.

Federal Reserve Board approves rule to simplify its capital rules for large banks, preserving the strong capital requirements already in place

Federal Register notice

Comprehensive Capital Analysis and Review 2020 Summary Instructions