WASHINGTON — The Federal Reserve proposed aligning new capital planning and stress test requirements for large banks with a supervisory regime that it established last year.
The central bank has recently updated how it assesses banks' capital strength under a variety of economic scenarios, including finalizing the new stress capital buffer in March.
The proposal unveiled Wednesday would link those updates with the tailoring framework created last year. The supervisory framework, mandated in part by the 2018 regulatory relief law, created four distinct categories of institutions facing differing levels of requirements based on their complexity.
The most demanding Category 1 banks includes the eight most complex firms — the U.S.-based global systemically important banks — with banks in the three other categories facing gradually less rigorous standards.
The new proposal would align the Fed's capital plan rule and stress capital buffer requirements with the four-tier tailoring framework. For example, Category 4 banks — defined as institutions with between $100 billion and $500 billion of assets — would have greater flexibility in developing capital plans and be excused from certain reporting requirements. However, the proposal would not alter any bank’s capital requirements.
Under the proposal, Category 4 banks would still be required to submit a capital plan to the Fed each year, but would no longer be required to calculate estimates of projected revenues, losses, reserves and minimum capital levels using the Fed’s stress test scenarios. Those firms would still have to submit a forward-looking income analysis as well as projected capital levels under baseline and severely adverse conditions.
However, the Fed would retain the ability to have Category 4 banks submit a capital plan under the Fed’s scenarios based on either the economic outlook or a firm’s financial condition, the regulator said in its proposal.
“While the proposal would no longer require firms subject to Category IV standards to include certain elements in their capital plans, all banking organizations, regardless of size and complexity, are expected to have the capacity to analyze the potential impact of adverse outcomes on their financial condition, including on capital,” the Fed said.
The Fed also proposed that for years when Category 4 banks are not subject to the stress testing cycle, those firms would get an up-to-date stress capital buffer requirement that would account for planned dividend payments. But those banks would also be able to undergo a stress test in an off-year in order to get a new stress capital buffer requirement to better reflect its risk profile.
“Such a firm would be a full participant in that year’s supervisory stress test, including disclosure of the firm’s supervisory stress test results, and would receive an updated stress capital buffer requirement like all other firms subject to the supervisory stress test,” the Fed said.
The Fed is also proposing new regulatory reporting requirements that “would introduce some additional compliance burden on firms subject to Category I through III standards, while significantly reducing compliance burden on firms subject to Category IV standards.”
Category 4 banks would still have to report data that the Fed deems necessary in order for it to execute a stress test.
The Fed is also asking for comment on how it should define “common stock dividends” in its capital plan rule, noting that there are currently a variety of ways that dividends and share repurchases are classified.
“For example, certain U.S. intermediate holding companies of foreign banking organizations have classified distributions to their parent companies as dividends, while other U.S. intermediate holding companies have classified similar distributions as non-dividend payouts,” the Fed said.
Although the Fed is not yet proposing a definition for common stock dividends, it is asking for feedback on whether it should define them as payments of cash to shareholders in proportion to the number of shares they own, and if it should include cash payments to parent organizations outside of a bank’s retained earnings.
The Fed is accepting comments on the proposal until Nov. 20.
