Modifications to the Capital Plan Rule and Stress Capital Buffer Requirement
Key claim: Large banks’ extra capital cushions will now be set from the average of the last two years of Federal Reserve stress-test losses instead of a single year, and the new cushion will take effect each January 1 rather than in the fall.
Abstract
(Rule · Federal Reserve System) The Board is adopting a final rule to amend the calculation of the Board’s stress capital buffer requirement applicable to certain large bank holding companies, savings and loan holding companies, U.S. intermediate holding companies of foreign banking organizations, and nonbank financial companies supervised by the Board to reduce the volatility of the stress capital buffer requirement. The final rule uses the average of the maximum common equity tier 1 capital ratio declines projected in each of the Board’s prior two annual supervisory stress tests to inform a firm’s stress capital buffer requirement. The final rule also extends the annual effective date of the stress capital buffer requirement by one quarter, to January 1, to provide additional time for firms to comply with the requirement. In addition, the Board is adopting changes to the FR Y-14A/Q/M reports to collect additional net income data that would improve the accuracy of the stress capital buffer requirement calculation. The final rule also amends the Stress Testing Policy Statement to remove the phase-in of highly material supervisory model changes.
Why this matters
The Stress Capital Buffer sits on top of minimum capital requirements for large U.S. banks and is the main channel through which the Fed’s annual stress tests bind real capital. Averaging two years of modeled losses dampens year-to-year volatility in required buffers, which affects how much capital banks must hold against dividends and buybacks. Moving the effective date to January 1 aligns the buffer with the calendar year and gives banks more time to plan capital actions after results are published.