Fed’s Quarles Floats Potential Changes to Stress Capital Buffer Proposal

The Federal Reserve is considering further refinements to its stress capital buffer proposal in response to industry calls for greater simplification, Vice Chairman for Supervision Randal Quarles said in a speech today. In his remarks, Quarles noted that the proposed stress leverage buffer requirement could be removed from the framework, along with a requirement for banks to pre-fund the next four quarters of their dividend payments.

To address concerns about procyclicality, Quarles also proposed two “co-equal options” for simplifying the stress capital buffer. The first option would involve raising the baseline for the countercyclical capital buffer to a positive figure that “would maintain the overall level of capital in the U.S. banking system throughout the business and financial cycles.”

The second option would raise the proposed stress capital buffer floor from the fixed 2.5% of risk-weighted assets to a higher level. “Raising the floor may help to reduce procyclicality by limiting the reduction in SB capital buffers when stress test losses decrease during good times,” Quarles noted. “Raising the floor would also help moderate any increase in those buffers at the onset of economic downturn conditions as losses begin to increase.”

Quarles noted that the Fed hopes to have the final SCB framework in place for the 2020 stress test cycle, which ABA has long called for. The association will continue to work with its members to provide feedback to the Fed on any proposed changes.