Fed Finalizes Countercyclical Capital Buffer Proposal

The Federal Reserve today issued its final policy statement outlining the framework the agency will follow in setting the Countercyclical Capital Buffer for banking organizations using the Basel III advanced approaches. It outlines several factors the Fed will consider as it evaluates settings for the buffer.

The CCyB is a tool by which the Fed can gradually raise the capital requirements on internationally active banking organizations — typically those with assets of over $250 billion or over $10 billion in on-balance sheet foreign exposures — when there is a risk of meaningfully above-normal losses in the future. Once phased in, the buffer would range from 0 percent of risk-weighted assets in times of moderate vulnerability to a maximum of 2.5 percent when risk is determined to be higher. Banks failing to meet the buffer will face restrictions on capital distributions and the payment of discretionary bonuses.

Under the framework, the Fed will take into account a range of financial system vulnerabilities and other factors, including leverage in the nonfinancial sector, leverage in the financial sector, maturity and liquidity transformation in the financial sector and asset valuation pressures. The Fed will also monitor a number of financial and economic indicators to assess risk to financial stability and expects to remove the buffer when conditions warrant. The policy statement takes effect on Oct. 14. For more information, contact ABA’s Hugh Carney.