On September 26, 2016, the Federal Reserve Board (FRB) invited public comment on its proposed rule modifying its capital plan and stress testing rules for the 2017 cycle. The proposed rule would take effect for the 2017 Comprehensive Capital Analysis and Review (CCAR). Comments on the proposal are due by November 25, 2016.1
The proposed rule would tailor the FRB’s CCAR to remove certain large and noncomplex firms from the qualitative assessment of CCAR.2
The proposed rule would also reduce certain reporting requirements for these firms. The firms would continue to be subject to the quantitative requirements of CCAR, as well as normal supervision by the FRB regarding their capital planning.3
What qualifies a firm as a large and noncomplex firm?
Bank holding companies (BHCs) with total consolidated assets between $50 billion and $250 billion, on-balance sheet foreign exposure of less than $10 billion, and total consolidated nonbank assets of less than $75 billion are considered large and noncomplex firms.4
The FR Y-9LP (Parent Company Only Financial Statements for Large Holding Companies) will include a new line item that will facilitate identification of large and noncomplex firms.
What are the implications of the proposed rule?5
1. In scope BHCs will no longer be subject to the qualitative assessment. They will however continue to remain subject to the existing quantitative criteria.
The proposal will facilitate the assessment of noncomplex firms’ capital planning processes through the regular supervisory process and targeted horizontal assessments of particular aspects of capital planning rather than the intensive CCAR qualitative horizontal assessment. The supervisory process will focus on targeted assessments with communicated scope of the assessment in advance.
2. The detail required for CCAR regulatory reporting would be reduced and materiality thresholds on specific portfolios beginning with CCAR 2017 cycle would be raised.
The rule proposes to remove the requirement of Appendix A for 14A for noncomplex firms and several sub-schedules from FR Y-14A Summary Schedule for noncomplex firms.
3. The de minimis exception threshold for all bank holding companies will be lowered. Currently, if a firm does not receive an objection to its capital plan, it may distribute up to 1 percent of its tier 1 capital above the distributions in its capital plan. The proposal would reduce that amount to 0.25 percent of tier 1 capital.
In addition the proposal would amend the de minimis exception to include a one quarter black-out period (Q2, which is when Fed is reviewing CCAR analysis).
4. The proposed rule includes changes to assumptions used in modeling scenarios for trading and counterparty component of its stress test –The “As-Of” Date for data used for global market shock for adverse and severely adverse scenarios (currently set between January 1 and March 31) will be extended to October 1 of the preceding year up to March 31.
Take-aways for clients
The proposed rule would take effect for 2017 CCAR, This proposed change will mostly affect US banks as well as intermediate holding companies of foreign banking organizations, that each has between $50 billion and $250 billion in assets. While all CCAR banks will still have to demonstrate that their capital levels can sustain stressed scenarios in order to get approval from the FRB for capital actions (i.e. quantitative assessment), large and noncomplex banks under the proposed definition will realize relief from over-investing in stress testing and capital planning processes that are unnecessary to adequately capture the risks of these firms, given the public profile of the qualitative assessment. Furthermore, the large and noncomplex banks will also benefit from the reduced reporting requirements that for some have proved to be operationally burdensome.
- Board of Governors of the Federal Reserve System, Press Release, September 26, 2016. Access at: http://www.federalreserve.gov/newsevents/press/bcreg/20160926a.htm
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