Fed to Phase Out ‘Qualitative Objection’ Component of CCAR Process

Beginning in the 2019 cycle, the Federal Reserve will limit its use of the “qualitative objection” in its Comprehensive Capital Analysis and Review exercise, the agency announced today. Five of the nation’s largest banks, all with overseas parent companies, will be subject to the qualitative assessment during the 2019 cycle, the Fed said.

Under the final rule, firms that participate in four CCAR exercises and successfully pass the qualitative evaluation in the fourth year will no longer be subject to the evaluation. A firm that fails to pass in the fourth year will continue to be subject to a possible qualitative objection until it passes. Except for any firms that receive a qualitative objection in the immediately prior year, the Fed will no longer issue qualitative objections effective Jan. 1, 2021. The American Bankers Association has long called for the elimination of the qualitative objection component of the CCAR exercise.

Along with the final rule, the Fed also released the instructions for this year’s CCAR exercise, which will involve 18 of the nation’s largest banks. Eleven firms with large trading operations will be required to factor in a global market shock as part of their scenarios. Thirteen firms with substantial trading or processing operations will also be required to incorporate a counterparty default scenario.

In related news, the Fed today voted for the third year in a row to hold the countercyclical capital buffer for banking organizations using the Basel III advanced approaches at zero percent. The buffer is a tool by which the Fed can gradually raise the capital requirements on internationally active banking organizations when there is a risk of meaningfully above-normal losses in the future. ABA has also opposed the use of the countercyclical capital buffer, noting in previous comments that countercyclicality is already addressed through the U.S. stress testing regime.