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The Federal Reserve Board will likely subject large banks to higher minimum capital levels as part of their annual stress tests than the capital requirements that have resulted from past tests, Fed Gov. Daniel Tarullo said Monday.
November 23 -
In a surprise move, the Federal Reserve Board proposed significant changes to its stress testing regime, including dropping its Tier 1 Common Capital requirements and delay leverage and risk-based capital ratio requirements for banks with "advanced approaches" in risk-based modeling.
July 17
WASHINGTON – The Federal Reserve on Wednesday finalized certain changes to its stress testing program for 2016, including phasing out certain capital requirements and delaying the implementation of others.
The final changes, which are substantially similar to those the Fed proposed in July, will fully phase in the common equity Tier 1 capital requirement in the 2016 Comprehensive Capital Analysis and Review stress testing cycle. In turn, the 2016 CCAR cycle will drop the requirement for banks to calculate the Tier 1 common ratio, as the two ratios would be duplicative.
The final rule will also delay the application of the supplemental leverage ratio by one year to 2017. The supplemental ratio applies to large bank holding companies and state-chartered banks that are subject to the so-called "advanced approaches" risk-based capital framework.
The "advanced approaches" framework is a concept outlined in the Basel III accords that allows banks with either $250 billion in assets or $10 billion in foreign assets to use their own proprietary means to calculate regulatory capital and determine minimum requirements in lieu of the Fed's own standard measure. The Fed must approve the bank's calculator, however, and to date 10 banks – Bank of America, Wells Fargo, Citigroup, Goldman Sachs, JPMorgan Chase, Bank of New York Mellon, Morgan Stanley, Northern Trust, U.S. Bancorp and State Street – have gained approval.
The final rule also bars banks from using their "advanced approaches" calculators for calculating their risk-based capital standards indefinitely.
The CCAR and related Dodd-Frank Act Stress Test have emerged as one of the Fed's most important supervisory tools since Dodd-Frank was passed, allowing the central bank to examine the balance sheets of banks with more than $50 billion in assets in great detail every year. The Fed said that it received only five comments on the proposed changes and they were generally supportive, though some addressed broader concerns about stress testing policies not addressed in the proposal.
Federal Reserve Board Gov. Daniel Tarullo said on Monday that the Fed is considering broader changes to the CCAR and DFAST stress tests that would direct the tests more toward uncovering not only issues with the health of banks individually, but macroeconomic issues arising from financial interactions between banks. Tarullo said that it has not yet been determined exactly how the tests might change to reflect those concerns, but that the net effect would likely be higher capital ratios.
