The Federal Reserve today released a proposed rule that would exempt many regional banks from the complex qualitative requirements of its annual Comprehensive Capital Analysis and Review, or CCAR, process. The rule would apply starting in 2017 to banks with between $50 billion and $250 billion in assets without significant international or nonbank activity.
“We appreciate the Fed’s efforts to examine the stress test process and seek improvements,” said Rob Nichols, president and CEO of the American Bankers Association, which has for years sought reforms to the CCAR process. “We’ve long believed CCAR is a bad fit for regional banks, which include different-sized institutions with a variety of business models and unique geographic footprints.” Nichols called for further regulatory tailoring, including congressional action to remove stress tests requirements for banks with as little as $10 billion in assets.
The Fed’s proposal, announced in a speech today by Fed Governor Daniel Tarullo, comes in response to arguments from ABA that the CCAR process was proving costlier to the smaller banks in its purview than the supervisory value it produced. “Officials from these banks expressed the view that the CCAR qualitative assessment was unduly burdensome because it created pressure to develop complex processes, extensive documentation, and sophisticated stress test models that mirrored those in use at the largest, most complex firms,” he said.
Tarullo also said the Fed is considering a future proposal to replace the existing 2.5 percent countercyclical capital buffer with a “stress capital buffer” as part of the CCAR process. The SCB would be at least 2.5 percent but would vary to match the maximum decline in a firm’s common equity tier 1 capital ratio under the stress test’s “severely adverse” scenario, with “significant increases” in capital anticipated for the eight U.S. institutions designated as global systemically important banks.
“We will carefully evaluate the [SCB] concept,” Nichols added, expressing concern “that it may not preserve the proper function of a capital buffer — to absorb losses in a stressful period — and instead could impose unnecessarily high capital requirements that would make it harder for banks to make loans that help our economy grow.” For more information, contact ABA’s Hugh Carney.