Fed Finalizes Stress Capital Buffer Proposal, Completing Overhaul of Stress Test Framework

The Federal Reserve today released a long-awaited final rule simplifying the complex stress testing and capital planning framework for the nation’s largest banks. The new, simplified framework will integrate the Fed’s supervisory stress tests—which are one component of the annual Comprehensive Capital Analysis and Review—with the board’s non-stress capital requirements, resulting in an overall reduction of the total number of capital requirements from 13 to eight.

The final rule—the last piece of a years-long regulatory reform effort—effectively ends the “pass-fail” nature of the CCAR process, replacing it instead with a “stress capital buffer” which will be calculated based on the results of the stress test. The Fed estimates that under the new SCB framework, common equity tier 1 capital requirements will increase by $11 billion in aggregate, or 1%. Significantly, as advocated by the American Bankers Association, the Fed omitted a proposed stress leverage buffer from the final rule.

“Following the financial crisis, the Board responded by both strengthening capital requirements and by establishing rigorous stress tests,” said Fed Vice Chairman for Supervision Randal Quarles. “Each of these measures helped improve the resilience of banks, but they were developed in parallel, leading to unnecessary complexity and partial redundancy. The SCB takes the best elements of both frameworks.”

The final rule—which applies to bank holding companies and U.S. intermediate holding companies of foreign banking organizations with more than $100 billion in assets—will be in effect for the 2020 CCAR cycle. Along with the final rule, the Fed today issued this year’s CCAR instructions, confirming that 34 banks will participate in this year’s stress testing cycle.