New Federal Reserve Proposal Would Create New ‘Stress Capital Buffer’

The Federal Reserve today issued a proposal that would seek to more closely align the Fed’s forward-looking stress testing results with its non-stress capital requirements for banks with $50 billion or more in assets by basing capital requirements on stress test performance. If finalized, the rule would take effect next year.

The proposal would create a “stress capital buffer” that would be calculated based on the decrease in capital a firm experiences under the hypothetical severely adverse scenario in the annual Comprehensive Capital Analysis and Review. That buffer would then be added to the minimum capital requirements for the coming year. For global systemically important banks, the GSIB surcharge would be added to the stress capital buffer.

If finalized as proposed, it would reduce the total number of capital-related requirements that large firms are required to meet from 24 to 14. It would also effectively end the “pass or fail” nature of the CCAR process.

The Fed noted that “relative to current requirements, the proposed changes would generally maintain or somewhat increase the amount of capital required for GSIBs and generally decrease modestly the amount of capital required for most non-GSIBs.” It added that “no firm is expected to need to raise additional capital as a result of this proposal,” given that the affected firms already hold more capital than currently required.

Comments on the proposal are due 60 days after it is published in the Federal Register. The American Bankers Association is in the process of consulting with affected banks and reviewing the proposal and will submit a comment letter. To provide feedback or join the comment letter working group, contact ABA’s Hugh Carney.