Proposed Rule2025-06863
Modifications to the Capital Plan Rule and Stress Capital Buffer Requirement
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Published
April 22, 2025
Issuing agencies
Federal Reserve System
Abstract
The Board is inviting public comment on a notice of proposed rulemaking (the proposal) that would 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 proposal would use the average of the maximum common equity tier 1 capital declines projected in each of the Board's prior two annual supervisory stress tests to inform a firm's stress capital buffer requirement. The proposal would also extend 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 proposal would make 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, as well as remove data items that are no longer needed to conduct the supervisory stress test. The changes in the proposal are not designed to materially affect overall capital requirements and would decrease regulatory reporting burden.
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[Federal Register Volume 90, Number 76 (Tuesday, April 22, 2025)]
[Proposed Rules]
[Pages 16843-16860]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-06863]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 90, No. 76 / Tuesday, April 22, 2025 /
Proposed Rules
[[Page 16843]]
FEDERAL RESERVE SYSTEM
12 CFR Parts 225, 238 and 252
[Regulations Y, LL, and YY; Docket No. R-1866]
RIN 7100-AG92
Modifications to the Capital Plan Rule and Stress Capital Buffer
Requirement
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Board is inviting public comment on a notice of proposed
rulemaking (the proposal) that would 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 proposal would
use the average of the maximum common equity tier 1 capital declines
projected in each of the Board's prior two annual supervisory stress
tests to inform a firm's stress capital buffer requirement. The
proposal would also extend 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 proposal would make 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, as well as remove data
items that are no longer needed to conduct the supervisory stress test.
The changes in the proposal are not designed to materially affect
overall capital requirements and would decrease regulatory reporting
burden.
DATES: Comments must be received on or before June 23, 2025.
ADDRESSES: You may submit comments, identified by Docket R-1866 and RIN
7100 AG92, by any of the following methods:
Agency Website: <a href="https://www.federalreserve.gov/apps/proposals/">https://www.federalreserve.gov/apps/proposals/</a>.
Follow the instructions for submitting comments, including attachments.
Preferred Method.
Federal eRulemaking Portal: <a href="http://www.regulations.gov">http://www.regulations.gov</a>. Follow the
instructions for submitting comments.
Email: <a href="/cdn-cgi/l/email-protection#572722353b3e3434383a3a323923241731253579303821"><span class="__cf_email__" data-cfemail="611114030d0802020e0c0c040f1512210713034f060e17">[email protected]</span></a>. You must include docket number and
RIN in the subject line of the message.
Fax: (202) 452-3819 or (202) 452-3102.
Mail, Courier and Hand Delivery: Ann Misback, Secretary, Board of
Governors of the Federal Reserve System, 20th Street and Constitution
Avenue NW, Washington, DC 20551.
Instructions: All public comments are available from the Board's
website at <a href="https://www.federalreserve.gov/apps/proposals/">https://www.federalreserve.gov/apps/proposals/</a>as submitted,
unless modified for technical reasons. Accordingly, comments will not
be edited to remove any identifying or contact information. Public
comments may also be viewed electronically or in paper form in Room M-
4365A, 2001 C Street NW, Washington, DC 20551, between 9:00 a.m. and
5:00 p.m. on federal weekdays. For security reasons, the Board requires
that visitors make an appointment to inspect comments. You may do so by
calling (202) 452-3684. Upon arrival, visitors will be required to
present valid government-issued photo identification and to submit to
security screening in order to inspect and photocopy comments. For
users of TTY-TRS, please call 711 from any telephone, anywhere in the
United States.
FOR FURTHER INFORMATION CONTACT: Juan Climent, Deputy Associate
Director (202) 872-7526, Hillel Kipnis, Assistant Director, (202) 452-
2924, Andrew Willis, Manager, (202) 430-1667, Missaka Warusawitharana,
Manager, (202) 452-3461, Christopher Appel, Lead Financial Institution
Policy Analyst, (202) 973-6862, John Simone, Lead Financial Institution
Policy Analyst, (202) 245-4256, and Mehdi Beyhaghi, Principal
Economist, (202) 973-6909, Division of Supervision and Regulation; Asad
Kudiya, Deputy Associate General Counsel, (202) 360-6887, Julie
Anthony, Senior Special Counsel, (202) 658-9400, Jonah Kind, Senior
Counsel, (202) 452-2045, Legal Division. Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue NW,
Washington, DC 20551. For users of TDD-TYY, please call 711 from any
telephone, anywhere in the United States. Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue NW,
Washington, DC 20551.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
A. Planned Stress Test Public Comment Initiatives
B. Background on Stress Testing Framework and the Stress Capital
Buffer Requirement
C. Volatility in Capital Requirements
D. Summary of the Proposed Rule
II. Changes to the Calculation of the Stress Capital Decline
Component of the Stress Capital Buffer Requirement
A. Results Averaging
1. Reducing Volatility and Improving Predictability
2. Risk Sensitivity
3. Components of the Averaging Period
4. Averaging Period
5. Symmetric Averaging
6. Applicability
B. Changes to the Effective Date of the Stress Capital Buffer
Requirement and Dividend Add-on Component Calculation
1. Change Stress Capital Buffer Requirement Effective Date to
January 1
2. Amendment to the Dividend Add-on Component Calculation
C. Changes to Regulatory Reports
1. FR Y-14A/Q/M
III. Economic Analysis
A. Baseline Analysis
B. Proposal Versus Baseline
C. Reasonable Alternatives
D. Analysis of Benefits and Costs
Administrative Law Matters
A. Paperwork Reduction Act Analysis
B. Regulatory Flexibility Act Analysis
C. Plain Language
D. Providing Accountability Through Transparency Act of 2023
I. Introduction
A. Planned Stress Test Public Comment Initiatives and Broader Policy
Considerations
In December 2024, the Board announced that it would seek public
comment on a proposal to make significant changes to its supervisory
stress test practices and framework to improve their transparency and
reduce volatility.\1\
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\1\ See <a href="https://www.federalreserve.gov/newsevents/pressreleases/bcreg20241223a.htm">https://www.federalreserve.gov/newsevents/pressreleases/bcreg20241223a.htm</a>. In February 2025, the Board reiterated its
previous announcement that it would begin the public comment process
on changes to the supervisory stress test. See <a href="https://www.federalreserve.gov/newsevents/pressreleases/bcreg20250205a.htm">https://www.federalreserve.gov/newsevents/pressreleases/bcreg20250205a.htm</a>.
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[[Page 16844]]
This notice of proposed rulemaking (proposal) would help to reduce
volatility of the stress capital buffer requirements. The Board also
plans to issue proposals to seek public comment on the models it uses
to determine the hypothetical losses and revenue of firms for the
supervisory stress test and on a process to update the models at a
frequency that ensures they remain dynamic while still subjecting those
future changes to notice and comment. The Board also plans to seek
public comment on the supervisory scenarios used in the supervisory
stress test. In doing so, the Board seeks to improve the transparency
of its supervisory stress test, while retaining appropriate risk
sensitivity and risk capture in capital requirements, as well as
effective tools for understanding and assessing risk. Maintaining the
capacity to regularly update the supervisory stress test models and
supervisory scenarios is integral to ensuring the stress test's ability
to capture changes in the risks in the financial industry over time.
The Board is also considering broad modifications to its regulatory
capital and capital planning requirements for large firms to ensure
they remain cohesive and effective, maintain the resilience of the
banking sector, and minimize any unnecessary burden. The Board will
make any changes to its rules through the public notice and comment
process.
Question 01: The Board seeks comment on all aspects of the proposal
and its intended approach to seek comment on other significant changes
to its supervisory stress test. What, if any, other elements of the
supervisory stress test framework should the Board consider amending to
improve the transparency and effectiveness of its supervisory stress
test? For example, the Board could instead provide firms with their
stress capital buffer requirements before firms are required to submit
their annual capital plans. What would be the advantages and
disadvantages of this approach? As an additional example, the Board's
Stress Testing Policy Statement states that some variables, such as the
unemployment rate, generally will increase by a certain amount or rise
to a certain level in the severely adverse scenario.<SUP>2</SUP> What
would be the advantages and disadvantages of the Board defining the
paths of other variables in the severely adverse scenario? On which
variables should the Board consider defining paths and why?
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\2\ See 12 CFR 252, Appendix B.
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B. Background on Stress Testing Framework and the Stress Capital Buffer
Requirement
Stress testing is a core element of the Board's regulatory
framework and supervisory program for large firms. The stress test
enables the Board to assess whether 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 (collectively, firms) have sufficient capital
to absorb potential losses and continue lending under a set of
hypothetical severely adverse conditions, although it is not designed
or intended to be predictive of future economic conditions. Since its
inception in 2009, supervisory stress testing \3\--together with
stronger capital requirements implemented in the Board's capital rule--
has played a critical role in helping to ensure the resilience of the
U.S. banking system.\4\
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\3\ In 2009, the Board used the supervisory stress test to
assess the capital sufficiency of large banking organizations under
stress in the Supervisory Capital Assessment Program (SCAP). In
2012, the Board finalized a rule that subjects large firms to annual
supervisory stress testing. See 77 FR 62378 (October 12, 2012).
\4\ The common equity capital ratios of firms subject to the
supervisory stress test have more than doubled since 2009, with
common equity capital at such firms increasing by over $1 trillion,
based on FR Y-9C report (Consolidated Financial Statements for
Holding Companies) filings.
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Each June, the Board publishes the results of its annual
supervisory stress test, including each firm's projected capital
ratios, pre-tax net income, losses, revenues, and expenses, under
severely adverse economic and financial conditions. The Board projects
these results using a set of supervisory models that take as inputs
firm-provided data on firms' financial conditions and risk
characteristics, as well as the Board's supervisory scenarios.\5\ The
supervisory models are developed by the Board, in accordance with the
Board's Stress Testing Policy Statement.
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\5\ For more information on the scenarios, see Board of
Governors of the Federal Reserve System, 2024 Stress Test Scenarios
(Feb. 2024), <a href="https://www.federalreserve.gov/publications/files/2024-stress-test-scenarios-20240215.pdf">https://www.federalreserve.gov/publications/files/2024-stress-test-scenarios-20240215.pdf</a>.
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Based on the supervisory stress test results, the Board calculates
each firm's preliminary stress capital buffer requirement as the
difference between the firm's starting and minimum projected common
equity tier 1 capital ratio under the severely adverse scenario in the
supervisory stress test (stress capital decline component), plus four
quarters of planned common stock dividends as a percentage of risk-
weighted assets (dividend add-on component). The stress capital buffer
requirement has a minimum value of 2.5 percent of risk-weighted assets.
A firm can adjust the amount of its planned dividends after receiving
its preliminary stress capital buffer requirement. A firm can also
request reconsideration of the calculation of its preliminary stress
capital buffer requirement. The final stress capital buffer
requirement, which includes any updates to a firm's dividend add-on or
stress capital decline component since the preliminary requirement,
becomes part of the firm's ongoing capital requirements, generally
effective October 1 of a given year.\6\
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\6\ See 12 CFR 225.8(h)(4).
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The stress capital buffer requirement is generally recalculated
annually based on the latest supervisory stress test results, making
the requirement sensitive to changes in a firm's risk profile and
economic conditions.\7\ The Board can also recalculate a firm's stress
capital buffer requirement if the firm experiences a material change to
its risk profile, financial condition, or corporate structure (material
change). A firm that has its stress capital buffer requirement
recalculated outside of the regular timeline is also given the
opportunity to adjust its planned dividends and request reconsideration
of its stress capital buffer requirement.
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\7\ A firm subject to Category I-III standards must participate
in the supervisory stress test every year, while a firm subject to
Category IV standards is generally required to participate only
every other year. See 12 CFR 217.2 and 12 CFR 252.5; see also
Prudential Standards for Large Bank Holding Companies, Savings and
Loan Holding Companies, and Foreign Banking Organizations, 84 FR
59032 (Nov. 1, 2019). In 2019, the Board adopted rules establishing
four categories of prudential standards for U.S. banking
organizations with total consolidated assets of $100 billion or more
and foreign banking organizations with combined U.S. assets of $100
billion or more. Category I standards apply to U.S. global
systemically important bank holding companies (GSIBs) and their
depository institution subsidiaries. Category II standards apply to
banking organizations with at least $700 billion in total
consolidated assets or at least $75 billion in cross-jurisdictional
activity and their depository institution subsidiaries. Category III
standards apply to banking organizations with total consolidated
assets of at least $250 billion or at least $75 billion in weighted
short-term wholesale funding, nonbank assets, or off-balance sheet
exposure and their depository institution subsidiaries. Category IV
standards apply to banking organizations with total consolidated
assets of at least $100 billion that do not meet the thresholds for
a higher category and their depository institution subsidiaries.
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The stress capital buffer requirement contributes to a firm's
overall standardized approach capital conservation buffer requirement,
along with any applicable countercyclical capital buffer requirement
and GSIB
[[Page 16845]]
surcharge requirement.\8\ The Board implemented capital buffer
requirements following the 2007-2009 financial crisis, during which
some firms continued to pay dividends and discretionary bonuses as
their financial positions deteriorated.\9\ Capital buffers are intended
to help firms maintain sufficient capital to absorb losses and support
lending and other financial intermediation in periods of stress,
protecting the financial system's stability.
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\8\ See 12 CFR 217.11.
\9\ See 8 FR 62018 (Oct. 11, 2013). See also Hirtle, Bank
Holding Company Dividends and Repurchases during the Financial
Crisis, Federal Reserve Bank of New York Staff Report, No. 666,
Abstract (March 2014), <a href="https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr666.pdf">https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr666.pdf</a> (``Many large U.S. bank
holding companies (BHCs) continued to pay dividends during the 2007-
09 financial crisis, even as financial market conditions
deteriorated, large losses accumulated, and emergency capital and
liquidity were being provided by the official sector.'').
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The stress capital buffer requirement helps ensure that capital
requirements include a forward-looking estimate of capital needs under
hypothetical adverse economic conditions. In this sense, the
supervisory stress tests can help augment minimum capital requirements,
such as those based on the risk weights assigned to exposures under the
standardized approach. Incorporating stress capital buffer requirements
into firms' capital planning processes affects firms' decisions about
capital planning, firm investments, portfolio composition, and
financial intermediation. Thus, changes to the stress capital buffer
framework could have important macroeconomic implications, given that
the firms subject to the supervisory stress test are typically large
financial institutions whose provision of credit impacts the state of
the U.S. economy.
Statutory Authorities for the Board's Stress Testing and Stress Capital
Buffer Framework
The International Lending Supervision Act of 1983 provides the
Board with broad discretionary authority to set minimum capital levels
for state member banks and certain affiliates of insured depository
institutions, including holding companies, supervised by the Board.\10\
Under section 5(b) of the Bank Holding Company Act of 1956 (Bank
Holding Company Act), the Board may issue such regulations and orders
relating to capital requirements of bank holding companies as may be
necessary for the Board to carry out the purposes of the Bank Holding
Company Act.\11\ Foreign banking organizations with a U.S. branch,
agency, or commercial lending company subsidiary are made subject by
the International Banking Act of 1978 (International Banking Act) to
the provisions of the Bank Holding Company Act in the same manner as
bank holding companies; \12\ therefore, the Board is also authorized
under section 5(b) of the Bank Holding Company Act to impose these
requirements on those foreign banking organizations, including on their
U.S. operations. Similarly, with regard to savings and loan holding
companies, section 10(g) of the Home Owners' Loan Act authorizes the
Board to issue such regulations and orders relating to capital
requirements as the Board deems necessary and appropriate to carry out
the purposes of the Home Owners' Loan Act.\13\
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\10\ See 12 U.S.C. 3902(1); 3907(a); 3909(a)(2).
\11\ 12 U.S.C. 1844(b).
\12\ See 12 U.S.C. 3106.
\13\ See 12 U.S.C. 1467a(g)(1).
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Section 165 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act),\14\ as amended by section 401 of the
Economic Growth, Regulatory Relief, and Consumer Protection Act,\15\
requires the Board to establish risk-based capital requirements for
bank holding companies with $250 billion or more in total consolidated
assets and nonbank financial companies supervised by the Board.\16\
Additionally, section 165(i)(1) of the Dodd-Frank Act, as amended by
section 401 of the Economic Growth, Regulatory Relief, and Consumer
Protection Act, requires the Board to conduct an annual supervisory
stress test of bank holding companies with $250 billion or more in
total consolidated assets.\17\ Section 401(e) of the Economic Growth,
Regulatory Relief, and Consumer Protection Act requires the Board to
conduct periodic stress tests for bank holding companies with total
consolidated assets between $100 billion and $250 billion.\18\
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\14\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376 (2010).
\15\ Economic Growth, Regulatory Relief, and Consumer Protection
Act, Public Law 115-174, 132 Stat. 1296 (2018).
\16\ See 12 U.S.C. 5365(b)(1)(A)(i). The term bank holding
company as used in section 165 of the Dodd-Frank Act includes a
foreign bank or company treated as a bank holding company for
purposes of the Bank Holding Company Act, pursuant to section 8(a)
of the International Banking Act. See 12 U.S.C. 3106(a); 12 U.S.C.
5311(a)(1). See also section 401(g) of the Economic Growth,
Regulatory Relief, and Consumer Protection Act (regarding the
Board's authority to establish enhanced prudential standards for
foreign banking organizations with total consolidated assets of $100
billion or more).
\17\ See 12 U.S.C. 5365(i)(1).
\18\ 12 U.S.C. 5365 note.
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Section 401 of the Economic Growth, Regulatory Relief, and Consumer
Protection Act also added section 165(a)(2)(C) of the Dodd-Frank Act,
which authorizes the Board to apply any prudential standard established
under section 165 to any bank holding company or bank holding companies
with $100 billion or more in total consolidated assets to which the
prudential standard does not otherwise apply, provided that the Board
(1) determines that application of the prudential standard is
appropriate to prevent or mitigate risks to the financial stability of
the United States, or to promote the safety and soundness of such
firm(s); and (2) takes into consideration the capital structure,
riskiness, complexity, financial activities (including financial
activities of subsidiaries), size, and any other risk-related factors
of such firm(s) that the Board deems appropriate.\19\
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\19\ 12 U.S.C. 5365(a)(2)(C).
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Question 02: What other approaches, if any, should the Board
consider with respect to the supervisory stress test that would
continue to help ensure that large firms are operating safely and
soundly?
C. Volatility in Capital Requirements
A firm's supervisory stress test results can vary, in some cases
materially, from year to year based on several factors, including
changes in (1) firms' balance sheet size and risk or projected income
and expenses, (2) economic conditions since the previous stress test,
(3) the severely adverse scenario used in the supervisory stress test,
and (4) the supervisory models used in the supervisory stress test.
Changes in the composition or health of a firm's balance sheet can lead
to changes in the supervisory stress test results, as the stress test
is sensitive to the outlook for distinct asset classes and revenue
sources under adverse economic conditions.\20\
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\20\ For data on estimated stress capital buffer requirements
under various policy scenarios, see Section III.D.1, table 1 in the
economic impact assessment.
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Stress test results may vary from year to year due to changes in
economic conditions since the previous stress test (the jumping off
point of each year's scenario) and changes in scenario variables over
the projection period, which is the forward-looking part of the
scenario.\21\ The global market shock and
[[Page 16846]]
large counterparty default components of the supervisory severely
adverse scenario can also play a significant role in determining year-
over-year changes in stress capital buffer requirements, particularly
for large firms with substantial trading operations and counterparty
exposures.
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\21\ The conditions during the projection period include both
adjustments of the scenario determined, in part, by changes in
current economic conditions--for example, the unemployment rate
guide in the scenario design framework ties the increase in the
unemployment rate in a given scenario to the level of the
unemployment rate at the time the scenario is designed--and
discretionary changes to the salient risks featured in the scenario.
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Improvements to the supervisory models used to project a firm's
capital ratio can also lead to changes in results. The Board has a
policy of phasing in material model changes over a two-year period to
promote stability of the requirements. This policy reduces, but does
not eliminate, variability in stress test results driven by model
changes.
Significant year-over-year variation in capital requirements may
impact the provision of banking services.\22\ Such variation could
influence decision-making regarding investment and expansion, create
challenges in long-term capital planning, and impact the supply of
credit to households and businesses.
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\22\ See Fraisse, H., L[eacute], M. and Thesmar, D., 2020. The
real effects of bank capital requirements. Management Science,
66(1), pp.5-23; Jim[eacute]nez, G., Ongena, S., Peydr[oacute], J.L.
and Saurina, J., 2017. Macroprudential policy, countercyclical bank
capital buffers, and credit supply: Evidence from the Spanish
dynamic provisioning experiments. Journal of Political Economy,
125(6), pp.2126-2177; Gropp, R., Mosk, T., Ongena, S. and Wix, C.,
2019. Banks response to higher capital requirements: Evidence from a
quasi-natural experiment. The Review of Financial Studies, 32(1),
pp.266-299; Berger, A.N. and Udell, G.F., 1994. Did risk-based
capital allocate bank credit and cause a`` credit crunch'' in the
United States?. Journal of Money, credit and Banking, 26(3), pp.585-
628; Kashyap, A.K., Stein, J.C. and Hanson, S., 2010. An analysis of
the impact of `substantially heightened' capital requirements on
large financial institutions. Booth School of Business, University
of Chicago, mimeo, 2, pp.1-47; Peek, J. and Rosengren, E.S., 1997.
The international transmission of financial shocks: The case of
Japan. The American Economic Review, pp.495-505.
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Standard economic theory holds that abrupt changes in capital
requirements can be costly.\23\ When faced with a sudden increase in
the stress capital buffer requirement, a firm has various options to
meet the requirement, including using its retained earnings, shrinking
its management buffer (the amount of capital a firm holds above its
minimum requirements), reducing its risk-weighted assets, or issuing
equity externally.\24\
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\23\ Id.
\24\ Economic literature shows that banking organizations
maintaining robust capital buffers above required minimum ratios are
better equipped to absorb shocks and sustain lending during periods
of economic stress and uncertainty. See, e.g., Berger, A.N. and
Bouwman, C.H., 2013. How does capital affect bank performance during
financial crises?. Journal of financial economics, 109(1), pp.146-
176; Gale, D., 2010. The effects of bank capital on lending: What do
we know, and what does it mean?. International Journal of Central
Banking, 6(34), pp.187-204; Carlson, M., Shan, H. and
Warusawitharana, M., 2013. Capital ratios and bank lending: A
matched bank approach. Journal of Financial Intermediation, 22(4),
pp.663-687; Ramcharan R, Verani S, Van den Heuvel SJ. From Wall
Street to main street: the impact of the financial crisis on
consumer credit supply. The Journal of finance, June 2016.
71(3):1323-56; Berrospide, J.M. and Edge, R.M., 2024. Bank capital
buffers and lending, firm financing and spending: What can we learn
from five years of stress test results?. Journal of Financial
Intermediation, 57, p.101061.
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When a firm's new stress capital buffer requirement is
substantially higher than expected and its management buffer is
insufficient to meet the requirement, the firm might choose to raise
equity quickly, which can be complex and potentially more costly than
simply retaining earnings.\25\ Alternatively, or in conjunction with
raising equity, the firm might opt to make changes to its risk-weighted
assets, which could involve reducing lending and shrinking its balance
sheet. Sudden changes in stress capital buffer requirements might lead
a firm to sell off riskier assets or restructure its portfolio in ways
that could impact its long-term profitability and strategic
positioning.
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\25\ There are several reasons why an untimely capital raise
could be costly for banks. First, the market timing hypothesis
suggests that the relative cost of equity varies over time, with
managers preferring to raise equity when market conditions are
favorable. Second, information asymmetries play a role. Corporate
finance literature posits that market participants believe firm
managers have superior information about the company's performance,
prospects, and risks. This asymmetry leads external financiers to
demand higher returns to compensate for increased risk. As a result,
firms often must sell shares at a discount to their intrinsic value
when raising capital, diluting existing shareholders' wealth. The
urgency of the situation can exacerbate these effects, potentially
forcing even steeper discounts. See Graham, J.R. and Harvey, C.R.,
2001. The theory and practice of corporate finance: Evidence from
the field. Journal of financial economics, 60(2-3), pp.187-243;
Huang, R. and Ritter, J.R., 2005. Testing the market timing theory
of capital structure. Journal of Financial and Quantitative
Analysis, 1(2), pp.221-246.; Myers, S.C. and Majluf, N.S., 1984.
Corporate financing and investment decisions when firms have
information that investors do not have. Journal of financial
economics, 13(2), pp.187-221; Frank, M.Z. and Goyal, V.K., 2008.
Trade-off and pecking order theories of debt. Handbook of empirical
corporate finance, pp.135-202.
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Some firms have favored larger management buffers as an efficient
approach to addressing uncertainty in capital requirements.\26\ This
preference may stem from the flexibility and relative ease of
maintaining higher internal capital reserves compared to the challenges
associated with rapid business restructuring or raising capital in
potentially unfavorable market conditions. The proposal's approach to
reducing stress capital buffer requirement volatility might encourage
firms to decrease their management buffers, allowing them to deploy
capital more efficiently across business lines. Consequently, firms
might allocate more capital to lending and other financial
intermediation activities, potentially fostering economic growth.
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\26\ See Abad, J. and Pascual, A.G., 2022. Usability of Bank
Capital Buffers: The Role of Market Expectations (IMF WP/22/21)
(arguing that large U.S. banks in general hold lower management
buffers relative to non-U.S. banks due to the stress capital buffer
requirement but showing that all banks must have a sufficiently
large management buffer so that any potential changes in their
conditions in the future do not trigger the distribution
restrictions associated with capital buffer requirements).
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While the advantages of reducing stress capital buffer requirement
volatility are discussed above, there are certain trade-offs to
changing the current approach to stress capital buffer requirements.
For example, the current approach ensures that capital requirements
promptly adjust to reflect the most recent stress test results,
capturing the latest changes in a firms' risk exposures and overall
financial conditions.
D. Summary of the Proposed Rule
As discussed, volatility in stress capital buffer requirements can
potentially impact the provision of banking services. To address this
issue, the Board is issuing the proposal to (1) average the maximum
common equity tier 1 capital declines projected in each of the Board's
prior two annual supervisory stress tests to inform a firm's stress
capital buffer requirement, and (2) extend the annual effective date of
the stress capital buffer requirement by one quarter, from October 1 to
January 1. With the proposed revisions, the capital buffer requirements
would continue to be forward-looking and risk-sensitive, while reducing
the volatility of capital requirements and thereby allowing for
improved ability for firms to plan their capital positions and
financial intermediation activity.
The proposal also would modify elements of the FR Y-14A/Q/M
(Capital Assessments and Stress Testing) reporting forms to collect
data that would provide greater insight into the net income composition
of reporting firms and to eliminate data that are no longer needed to
conduct the supervisory stress test.\27\ This
[[Page 16847]]
information would lead to more precise projections of capital in the
supervisory stress test, which would better align the stress capital
buffer requirements to firms' risk profiles.
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\27\ Firms with over $100 billion in total consolidated assets
are required to submit the FR Y-14A/Q/M reports (Capital Assessments
and Stress Testing). The data within the FR Y-14A/Q/M reports are
used in the supervisory stress tests that inform firms' stress
capital buffer requirements. The data are also used to support other
Board supervisory efforts aimed at promoting the safety and
soundness of large firms.
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II. Changes to the Calculation of the Stress Capital Decline Component
of the Stress Capital Buffer Requirement
Currently, a firm's stress capital buffer requirement is informed
by the stress capital decline component of a single year's supervisory
stress test results. The proposal would modify the calculation of the
stress capital decline component of the stress capital buffer
requirement by averaging the maximum common equity tier 1 capital
decline from the current and prior year's supervisory stress test
results (results averaging).\28\ The revised calculation would be
applicable for firms beginning with the stress capital buffer
requirement following the 2025 supervisory stress test (that is, the
stress capital decline components from the 2024 and 2025 supervisory
stress tests would be averaged as part of the calculation).\29\ The
calculation of the dividend add-on component would continue to be
updated annually and be added to the averaged stress capital decline
component to generate a firm's stress capital buffer requirement. The
stress capital buffer requirement would remain floored at 2.5 percent
of risk-weighted assets.
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\28\ The proposal would add a new definition of ``stress capital
decline,'' which is identical to the calculation for the stress
capital decline component in the current framework. This new
definition is a technical change intended to simplify the
description of the averaging calculation and would not itself result
in any substantive changes to the rule.
\29\ For example, if the stress capital decline component of a
firm's 2024 supervisory stress test results showed a maximum common
equity tier 1 capital ratio decline of 3.5 percentage points and
this year's results showed a maximum common equity tier 1 capital
decline of 5.5 percentage points, then that firm's stress capital
decline component for purposes of the stress capital buffer
requirement calculation would be 4.5 percent. Assuming the firm had
a dividend add-on of 1.5 percentage points in the 2025 supervisory
stress test, then the firm's new stress capital buffer requirement
would be 6.0 percent. The averaging calculation for the stress
capital decline component would use the actual, maximum common
equity tier 1 capital ratio decline in the supervisory stress test,
even if that amount is below 2.5 percent (i.e., if the actual,
maximum common equity tier 1 capital ratio decline is 1.5 percent,
then 1.5 percent, and not the 2.5 percent stress capital buffer
requirement floor amount, would be used in the averaging
calculation). For example, if the stress capital decline component
of firm's 2024 supervisory stress test results showed a maximum
common equity tier 1 capital ratio decline of 2.0 percentage points
and this year's results showed a maximum common equity tier 1
capital decline of 4.0 percentage points, then that firm's stress
capital decline component for purposes of the stress capital buffer
requirement calculation would be 3.0 percentage points.
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A. Results Averaging
1. Reducing Volatility and Improving Predictability
Results averaging under the proposal would reduce volatility in the
stress capital buffer requirement by using an average of two results as
opposed to using a single year's results.\30\ Based on supervisory
stress test data from 2019 to 2024, the proposal would reduce
volatility in stress capital buffer requirements by approximately 17
percent compared to the current framework.\31\ For GSIBs, the analysis
shows a reduction in volatility in stress capital buffer requirements
of approximately 44 percent. This feature would preserve the ability of
the supervisory stress test to vary with changing risks, while
effectively phasing in any year-over-year changes to a firm's stress
capital buffer requirement. Additionally, by using the prior year's
results, firms would be better able to predict their upcoming capital
requirements. Results averaging would mitigate large and sudden changes
in capital requirements, thereby facilitating more robust capital
planning and supporting the provision of banking services.
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\30\ Chopin, N., 2004. Central limit theorem for sequential
Monte Carlo methods and its application to Bayesian inference (pp.
501-506).
\31\ The volatility of the stress capital buffer requirement is
measured as the mean of the absolute value of the year-on-year
change in the requirement. For more information on the overall
impact of the proposal, see Section III.
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2. Risk Sensitivity of Stress Capital Buffer Requirement
A firm's stress capital buffer requirement should be aligned with
the firm's risk profile. The stress capital buffer requirement is
currently informed by the results of a single supervisory stress test,
which, through supervisory models, considers the business profile of
each firm under the severely adverse scenario. While results averaging
would reduce the extent to which the stress capital buffer requirement
reflects the current business profile of a firm and may lengthen the
lag in recognition of changes in a firm's risk profile, results
averaging would continue to measure how a firm's salient risks would
behave under stressful conditions. Further, results averaging would
smooth changes in requirements caused by short-term, temporary changes
in risk profile.
3. Components of Averaging Calculation
Under the proposal, the stress capital buffer requirement would
continue to include a firm's stress capital decline component and the
dividend add-on component. While the stress capital decline component
would be averaged over the prior two annual supervisory stress tests,
the averaging calculation would not include the dividend add-on
component. Unlike the stress capital decline component, the size of a
firm's dividend add-on component is at the firm's discretion. While a
firm must provide the amount of its dividend add-on component prior to
knowing its stress capital decline component, the firm can revise its
dividend add-on component after receiving its preliminary stress
capital decline component informed by a given supervisory stress test.
Due to these features, the Board is not proposing to include the
dividend add-on component in its results averaging calculation.
A firm may also request reconsideration of its preliminary stress
capital buffer requirement within fifteen calendar days of receipt of
notice of a preliminary stress capital buffer requirement. The proposal
would preserve a firm's ability to request reconsideration of its
preliminary stress capital buffer requirement, with modifications to
account for the incorporation of averaging into the stress capital
buffer requirement calculation. In particular, the proposal would allow
a firm to request reconsideration of the stress capital decline of the
current capital plan cycle, which would be averaged with the stress
capital decline of the previous capital plan cycle to form the stress
capital decline component of the firm's stress capital buffer
requirement, as applicable. As is the case under the current framework,
the proposal would not allow firms to request reconsideration of a
stress capital decline based on a previous year's supervisory stress
test.
As previously mentioned, the Board currently phases in the effects
of highly material supervisory model changes over a two-year period to
mitigate sudden and unexpected changes to the supervisory stress test
results.\32\ This policy reduces volatility of stress test results as
it relates to supervisory model changes but does not reduce volatility
associated with the other elements that determine a firm's stress test
results (such as changes due to the paths of variables in the
supervisory scenario or changes in a firm's balance sheet). Since
[[Page 16848]]
the proposal would generally average changes to a firm's stress capital
decline component, material supervisory model changes would in most
cases mechanically be phased-in to the proposed calculation of the
stress capital decline component in the same manner as under the
current policy.\33\ Therefore, the Board proposes to revise its Stress
Testing Policy Statement to no longer specify that material supervisory
model changes would be phased in over a two-year period.
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\32\ See 12 CFR part 252 Appendix B, section 2.3.
\33\ Under the proposal, the effects of a material model change
would be fully incorporated into a firm's stress capital buffer
requirement if the firm receives a new stress capital buffer
requirement that is not calculated using results averaging in a year
when a material model change is implemented (that is, a stress
capital buffer requirement that is not calculated using results
averaging would incorporate the full effects of the model change
because those effects would not be phased in over two supervisory
stress testing cycles as they are under the current rule.)
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4. Averaging Period
The proposal would average the stress capital decline component
over two annual supervisory stress tests (current and previous year) to
inform the stress capital buffer requirement, effective in the
following year. Averaging over a longer period (for example, three
consecutive annual supervisory stress tests) may further reduce
volatility in stress capital buffer requirements. Based on supervisory
stress test data from 2019 to 2024, averaging over three consecutive
annual supervisory stress tests would reduce volatility in stress
capital buffer requirements by roughly 40 percent relative to the
current framework.\34\ However, extending the averaging period would
also reduce risk sensitivity because there is greater potential that a
firm's stress capital buffer would incorporate economic or financial
risks that are no longer pertinent to the firm and may include stale
information on the condition of a firm's business and the exposures on
its balance sheet. For example, if a firm sold a corporate loan
portfolio two years ago, the inclusion of that portfolio in the firm's
stress capital buffer requirement may no longer be reflective of the
firm's risk profile. Similarly, if a firm expanded rapidly in a high-
risk business or acquired riskier assets, a longer averaging period
would be slower to reflect that increase in risk. Therefore, the
proposal to average over two consecutive supervisory stress tests
strikes a better balance to reduce volatility and retain risk
sensitivity compared to averaging over a longer period.
---------------------------------------------------------------------------
\34\ For more information on the alternatives for results
averaging, see Section III.C.
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5. Symmetric Averaging
The proposal would apply results averaging symmetrically with
respect to increases and decreases in a firm's stress capital buffer
requirement to reduce volatility in stress capital buffer requirements,
as described in Section II.A.1 of this SUPPLEMENTARY INFORMATION.
Relative to the current framework, under symmetrical results averaging
a firm would be able to better project its stress capital buffer
requirement for any given year and, therefore, could better prepare to
maintain an appropriate level of capital, which would enable the firm
to implement its capital actions and business decisions as needed.
Further, results averaging for both increases and decreases would help
ensure that all changes in stress capital buffer requirements caused by
short-term, temporary changes due to any factor, such as changes in a
firm's risk profile, would be incorporated in smaller increments,
leading to a capital requirement better reflective of more sustained
changes in business profile and risks.
Applying results averaging only to increases, but not to decreases,
in a firm's stress capital decline component would be expected to
result in a smaller reduction in volatility in the long run compared to
symmetric averaging, because decreases in stress capital buffer
requirements also contribute to volatility.\35\ In addition, results
averaging only for increases would result in a somewhat lower average
level of the stress capital buffer requirement, which could modestly
reduce firms' average resilience to economic shocks.\36\ For these
reasons, the Board proposes to average results symmetrically to
calculate a firm's stress capital buffer requirement.
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\35\ See Section III.D.1, Table 1.
\36\ According to several studies, banking organizations with
robust capital buffers are better positioned to absorb shocks and
continue lending during periods of economic stress. See, e.g.,
Berger, A.N. and Bouwman, C.H., 2013. How does capital affect bank
performance during financial crises?. Journal of Financial
Economics, 109(1), pp.146-176; Admati, A.R. and Hellwig, M.F., 2024.
The Parade of the Bankers' New Clothes Continues: 44 Flawed Claims
Debunked. European Corporate Governance Institute-Finance Working
Paper, (951); Gale, D., 2010. The effects of bank capital on
lending: What do we know, and what does it mean?. International
Journal of Central Banking, 6(34), pp.187-204; Berrospide, J.M. and
Edge, R.M., 2024. Bank capital buffers and lending, firm financing
and spending: What can we learn from five years of stress test
results?. Journal of Financial Intermediation, 57, p.101061;
Carlson, M., Shan, H. and Warusawitharana, M., 2013. Capital ratios
and bank lending: A matched bank approach. Journal of Financial
Intermediation, 22(4), pp.663-687; Aiyar, S., Calomiris, C.W. and
Wieladek, T., 2014. Does macro[hyphen]prudential regulation leak?
Evidence from a UK policy experiment. Journal of Money, Credit and
Banking, 46(s1), pp.181-214; Ramcharan, R., Verani, S. and Van den
Heuvel, S.J., 2016. From Wall Street to main street: the impact of
the financial crisis on consumer credit supply. The Journal of
finance, 71(3), pp.1323-1356; Cohen, B.H. and Scatigna, M., 2016.
Banks and capital requirements: channels of adjustment. Journal of
Banking & Finance, 69, pp.S56-S69.
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6. Applicability
For firms subject to Category I-III standards, both the stress
capital decline component and the dividend add-on component of the
stress capital buffer requirement are updated every year. Because a
firm subject to Category I-III standards is generally subject to the
supervisory stress test every year, the proposed results averaging
would generally apply for such firms.
Reflecting their lower risk profile, firms subject to Category IV
standards are subject to the supervisory stress test on a biennial
basis.\37\ However, a firm subject to Category IV standards may elect
to participate in the supervisory stress test in a year in which it is
not otherwise subject to such test.\38\ The Board may also require such
a firm to participate in the supervisory stress test in a year in which
it is not otherwise subject to such test if the firm experiences a
material change to its risk profile, financial condition, or corporate
structure.\39\ In years in which these firms do not participate in the
supervisory stress test, the Board generally provides these firms with
a stress capital buffer requirement that is updated only to reflect
changes to the dividend add-on component.
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\37\ See Capital Planning and Stress Testing Requirement for
Large Bank Holding Companies, Intermediate Holding Companies and
Savings and Loan Holding Companies, 86 FR 7927 (February 3, 2021).
\38\ See 12 CFR 252.44(d)(2)(ii).
\39\ See 12 CFR 252.44(d)(2)(i). For example, in the 2023
supervisory stress test, the Board required three firms subject to
Category IV standards to participate.
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Consistent with current requirements, the stress capital buffer
requirement for a firm that does not participate in two consecutive
annual supervisory stress tests would continue to be informed solely by
the most recent supervisory stress test in which the firm
participated.\40\ If a firm subject to Category IV standards
participates in two consecutive supervisory stress tests for any
reason, then results averaging would apply under the proposal.
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\40\ For example, a firm's 2026 stress capital buffer
requirement would be solely based on the results of the 2026
supervisory stress test if the firm did not participate in the 2025
supervisory stress test.
---------------------------------------------------------------------------
As discussed, the Board can recalculate a firm's stress capital
buffer
[[Page 16849]]
requirement if that firm experiences a material change.\41\ In
situations where a firm undergoes a material change, such as a merger
or acquisition, results averaging as proposed may not be reflective of
the significant changes to the firm's business and balance sheet, as
the risk profiles of the firm could differ before and after the
material change. Therefore, to maintain risk sensitivity, the Board
proposes not to use results averaging when recalculating a firm's
stress capital buffer requirement because of a material change.\42\
However, the Board generally would resume results averaging for the
subsequent stress capital buffer requirement calculation if the stress
capital decline components from that and the previous calculation both
contemplate the material change. To align with the proposal to only
average results over a two-year period, the Board would use averaging
for a firm subject to Category IV standards when subject to a
recalculated stress capital buffer requirement only if the
recalculation and an annual supervisory stress test in which the firm
participates occur within the same calendar year or in consecutive
years.\43\
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\41\ For purposes of this discussion, the term ``material
change'' includes circumstances in which the Board, or the
appropriate Reserve Bank with the concurrence of the Board, has
directed a firm to resubmit its capital plan because its internal
stress scenario(s) are not appropriate for the firm's business model
and portfolios, or changes in financial markets or the macro-
economic outlook that could have a material impact on a firm's risk
profile and financial condition require the use of updated
scenarios. 12 CFR 225.8(e)(4)(i)(B)(3); 12 CFR
238.170(e)(4)(i)(B)(3).
\42\ In addition to a material change, the Board, or the
appropriate Reserve Bank with the concurrence of the Board, may
direct a firm to resubmit its capital plan where the capital plan is
incomplete or contains material weaknesses. 12 CFR
225.8(e)(4)(i)(B)(1); 12 CFR 238.170(e)(4)(i)(B)(1). In
circumstances where the Board recalculates a firm's stress capital
buffer requirement following such a resubmission, the Board would
use results averaging, because the risk profile of the firm is less
likely to have changed materially over the period being averaged.
\43\ For example, if a firm subject to Category IV standards had
its stress capital buffer recalculated due to a material change in
2024 and did not participate in the 2025 supervisory stress test,
then the calculation of the stress capital buffer requirement for
that firm following the 2026 supervisory stress test would not be
calculated by averaging the stress capital decline components from
the 2024 recalculation and the 2026 supervisory stress test. Rather,
the firm's stress capital buffer requirement would be informed
solely by the stress capital decline component from the 2026 stress
test.
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Question 03: What are the advantages and disadvantages of the
proposed results averaging calculation, including the proposal to base
the stress capital buffer requirement on the stress capital decline
components from the prior two consecutive, annual supervisory stress
tests?
Question 04: For firms subject to two consecutive, annual
supervisory stress tests, the proposal would calculate the stress
capital buffer requirement in three steps: (1) average the stress
capital decline components from the two most recent annual stress
tests; then (2) add the current dividend add-on component; and finally
(3) apply, as applicable, the 2.5 percent floor, in that order. What
are the advantages and disadvantages of this approach? What alternative
approaches should the Board consider for the calculation of the stress
capital buffer requirements?
Question 05: What alternative approaches should the Board consider
to reduce volatility in the stress capital decline component resulting
from material supervisory model changes, particularly for a firm that
is not subject to the supervisory stress test every year?
Question 06: What alternative approaches should the Board consider
as it relates to results averaging if a firm undergoes a material
change? What would be the advantages and disadvantages of these
alternatives?
Question 07: What alternative approaches to requiring a firm to
resubmit its capital plan should the Board consider in order to assess
a firm's capital adequacy after it experiences a material change? What
would be the advantages and disadvantages of these alternatives? What
other options should the Board consider to address material changes, if
any, and what would be their advantages and disadvantages?
Question 08: What would be the advantages and disadvantages of the
Board no longer retaining authority to direct a firm to resubmit its
capital plan in response to changes in financial markets or the
macroeconomic outlook that could have a material impact on the firm's
risk profile and financial condition? Under what circumstances, if any,
should the Board be able to direct a firm to resubmit its capital plan?
What would be the advantages and disadvantages of such approach?
Question 09: Under the current rule, a firm is subject to certain
automatic consequences, such as seeking prior approval for capital
distributions, resubmitting its capital plan, and having the Board
determine whether to recalculate the firm's stress capital buffer
requirement, if it undergoes or expects to undergo a material change.
The determination that a firm has undergone or expects to undergo a
material change can be made by the firm or by the Board. What would be
the advantages and disadvantages of removing some or all these
automatic consequences? What other consequences (automatic or
otherwise), if any, should the Board consider if a firm undergoes or
expects to undergo a material change?
Question 10: Under what circumstances, if any, should the Board
consider not using results averaging as proposed? What are the
advantages and disadvantages of not using results averaging? What
criteria should the Board consider in making a determination that
results averaging should not be used?
Questions 11: What other approaches should the Board consider for
mitigating volatility in the stress capital buffer requirements for
firms subject to the results averaging proposal?
Question 12: What would be the advantages and disadvantages to
averaging only the supervisory stress test results that would result in
an increase in stress capital buffer requirements while immediately
applying a decrease without averaging?
Question 13: Under what circumstances would firms not subject to
two consecutive annual supervisory stress tests be more or less likely
to opt-in to the supervisory stress test in an off-year as a result of
the proposal? What other options should the Board consider to reduce
volatility in the stress capital buffer requirements for such firms and
why? For example, what are the advantages and disadvantages of
averaging the two most recent stress capital declines for a firm that
is not subject to two consecutive annual supervisory stress tests?
Question 14: For purposes of calculating a firm's stress capital
buffer requirement using results averaging, what would be the
advantages and disadvantages of giving more weight to the most recent
stress capital decline than to the less recent (and therefore
potentially staler) stress capital decline? If the Board decided to
implement results averaging over a longer period to include firms that
are not subject to two consecutive annual supervisory stress tests,
what would be the advantages and disadvantages of differential
weightings of the stress capital declines for these firms? If
differential weighting were adopted, which would be the appropriate
weights and why?
Question 15: What would be the advantages and disadvantages of
first applying results averaging beginning with the stress capital
buffer requirement following the 2026 supervisory stress test, instead
of the 2025 stress test, as proposed?
Question 16: If results averaging is, as a general matter, first
applied beginning
[[Page 16850]]
with the stress capital buffer requirement following the 2026
supervisory stress test, what would be the advantages and disadvantages
of allowing a firm to opt in to results averaging with respect to the
stress capital buffer requirement that would become effective following
the 2025 supervisory stress test?
B. Changes to the Effective Date of the Stress Capital Buffer
Requirement and Dividend Add-On Component Calculation
1. Change Stress Capital Buffer Requirement Annual Effective Date to
January
The Board is proposing to extend the annual effective date of the
stress capital buffer requirement by one quarter for all firms subject
to the requirement. As proposed, the effective date of a firm's updated
stress capital buffer requirement would be moved to January 1 of the
year immediately following the calendar year in which its capital plan
was submitted, which represents an extension of one quarter from the
current effective date of October 1. This revision would help alleviate
the impact of large changes in capital requirements by providing firms
with additional time to comply with their updated stress capital buffer
requirements. Providing an additional three months to meet a new stress
capital buffer requirement would increase the firm's ability to make
any adjustments in its capital planning and to further retain earnings
to comply with the new requirement.
The Board considered alternative approaches to allow firms to
comply with changes in their capital requirements, such as phasing in
changes to the stress capital buffer requirement over two quarters or
extending the effective date of the stress capital buffer requirement
further past January 1. The Board did not propose these options as they
would add complexity to the buffer framework and reduce the risk-
sensitivity benefits of the stress capital buffer requirement,
respectively.
Question 17: What are the advantages and disadvantages of moving
the effective date of the stress capital buffer requirement from
October 1 to January 1? What other alternative dates or approaches to
modifying the effective date of the stress capital buffer requirement
should the Board consider, and why? Please provide any rationale or
data that may be helpful for the Board to consider.
Question 18: What would be the advantages and disadvantages of
extending further (for example, to April 1) the effective date of the
stress capital buffer requirement of firms subject to Category IV
standards that do not opt in to the off-cycle stress test in order to
provide additional time to address an unexpected result of the stress
test?
2. Amendment to Dividend Add-On Component Calculation
The dividend add-on component of the stress capital buffer
requirement comprises planned dividends in the fourth through seventh
quarters of the planning horizon of the supervisory stress test.\44\ A
firm subject to Category I-IV standards generally receives each year a
new stress capital buffer requirement, which generally becomes
effective on October 1.\45\ Under the current framework, the planned
dividends that are incorporated in the stress capital buffer
requirement align with the effective date of the stress capital buffer
requirement (that is, October 1 is the first day of the fourth quarter
of the planning horizon). The proposal would change the definition of
the dividend add-on component to cover dividends issued in quarters
five through eight, instead of four through seven, of the planning
horizon of the supervisory stress test. This revision would maintain
the alignment between the dividend add-on component and the one-year
period during which the stress capital buffer requirement is effective.
This proposed change is not intended to impact the overall size of the
stress capital buffer requirement.
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\44\ See 12 CFR 252.42. The planning horizon for the supervisory
stress test is nine consecutive quarters starting on the as of date
of the supervisory stress test.
\45\ See 12 CFR 225.8(h)(4)(ii)(A).
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Question 19: What are the advantages and disadvantages of the
proposed change to the dividend add-on component of the stress capital
buffer requirement?
Question 20: Under the Board's capital rule, a firm is required to
maintain risk-based capital ratios above its capital conservation
buffer requirement, which includes its stress capital buffer
requirement, in order to avoid restrictions on its capital
distributions and certain discretionary bonus payments. What would be
the advantages and disadvantages of modifying the capital rule such
that a firm could pay quarterly common stock dividends up to the amount
included in the dividend add-on component even if a firm's capital
level is within its capital conservation buffer requirement? How should
the Board consider such a policy in cases where the firm, after
subtracting the dividend add-on component, has a stress capital buffer
requirement below the 2.5 percent stress capital buffer floor?
Question 21: What would be the advantages and disadvantages of
removing the dividend add-on component from the calculation of a firm's
stress capital buffer requirement?
Question 22: The Board seeks comment on all aspects of the dividend
add-on component of the stress capital buffer requirement. Please
provide any rationale or data that may be helpful for the Board to
consider.
Question 23: What other changes should the Board consider to the
supervisory stress test cycle that would improve the effectiveness and
efficiency of the capital plan rule?
C. Regulatory Reports
1. FR Y-14 Reports
In addition to the changes discussed above, which do not directly
impact any information collections, the Board proposes to revise the FR
Y-14A/Q/M reports by refining the collection of information used to
assess a firm's net income under stress, as described in the Paperwork
Reduction Act section below. The proposed revisions would strengthen
the Board's ability to evaluate components of a firm's net income in
the supervisory stress test, which would allow for a more accurate
calculation of a firm's stress capital buffer requirement. The proposed
revisions would also remove several items that are no longer needed to
conduct the supervisory stress test.
Question 24: What, if any, modifications should the Board consider
to the FR Y-14A/Q/M reports to reduce regulatory burden while
maintaining the ability to effectively perform the supervisory stress
test? For example, are there specific items on the FR Y-14A/Q/M reports
that the Board should consider discontinuing? What would be the
advantages and disadvantages of these changes to the FR Y-14A/Q/M
reports?
III. Economic Analysis
The proposed changes to the Board's supervisory stress testing
framework aim to reduce the volatility of capital requirements and
provide more time for firms to adjust their capital plans in response
to updated stress capital buffer requirements. These measures would
allow firms to streamline their capital planning while maintaining
adequate capital to withstand economic shocks. The Board evaluated the
potential impacts of these changes on the affected firms and the
broader economy.
The economic analysis is structured into four parts. The first
part, an
[[Page 16851]]
overview of the baseline, describes the current state of supervisory
stress testing practices. The second part presents a discussion of the
proposal. The third part presents a discussion of alternatives to the
current approach. The fourth part presents estimated changes in the
level and volatility of capital requirements resulting from the revised
stress capital buffer calculation under the proposal and under
reasonable alternatives and provides a detailed discussion of potential
costs and benefits of the proposed changes.\46\
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\46\ For more information on the models and bank-provided data,
see Board of Governors of the Federal Reserve System, 2024
Supervisory Stress Test Methodology (March 2024), <a href="https://www.federalreserve.gov/publications/files/2024-march-supervisory-stress-test-methodology.pdf">https://www.federalreserve.gov/publications/files/2024-march-supervisory-stress-test-methodology.pdf</a>.
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A. Baseline Analysis
The current framework (discussed in detail in Section I of this
Supplementary Information) serves as the baseline for the economic
analysis. The Board assessed the costs and benefits of the proposal
(discussed in detail in Section II of this Supplementary Information)
and other policy alternatives (discussed below in Section III.C of this
Supplementary Information) relative to this baseline.
Under the current framework, a firm's stress capital buffer
requirement is determined based on the most recent supervisory stress
test results and the dividend add-on component, and is floored at 2.5
percent of risk-weighted assets. Firms subject to Category I-III
standards are subject to the supervisory stress test annually. Firms
subject to Category IV standards are subject to the supervisory stress
test on a two-year cycle, unless they choose, or are otherwise
required, to be subject to the annual stress test. A firm's preliminary
stress capital buffer requirement is set in June and its final stress
capital buffer requirement generally becomes part of the firm's ongoing
capital requirement on October 1. As a result, firms have approximately
one quarter to comply with the updated requirement.
As discussed in Section I.C of this Supplementary Information, a
firm's stress capital buffer requirement can change from year to year
based on several factors. These factors include changes in the
composition of a firm's risk profile, economic conditions since the
previous stress test, the severely adverse scenario used in the
supervisory stress test, and the supervisory models used in the
supervisory stress test.
B. Proposal Relative to Baseline
As discussed in detail in Section II of this Supplementary
Information, under the proposal, all the elements of the current
framework would be maintained except that (1) a firm's final stress
capital buffer requirement would be informed by both the current and
prior year's supervisory stress test results; and (2) a firm would have
until January 1, instead of October 1, to meet its stress capital
buffer requirement.
A firm's stress capital buffer requirement would be set using the
average of the maximum common equity tier 1 capital decline in the
current year's stress test and the maximum common equity tier 1 capital
decline in the prior year's stress test. Under the proposal, the stress
capital buffer requirement would continue to be based on the most
recent stress test results for most firms subject to Category IV
standards, which are required to participate in the supervisory stress
tests every other year. Moreover, regardless of a firm's category, a
firm would have two quarters to comply with changes in the stress
capital buffer requirement, compared to one quarter under the current
framework.
C. Reasonable Alternatives
The Board has identified several alternatives to the proposal that
could help firms better manage stress capital buffer requirement
volatility while maintaining the benefits of the stress capital buffer
requirement. These alternatives differ in (1) their approach to
smoothing stress capital buffer requirement levels and (2) in their
timelines for compliance. The following section discusses alternatives
and explains how they differ from the baseline and the proposal.
1. Alternative 1: Current Framework With One-Quarter Delay
This alternative deviates from the baseline in that firms would
have until January 1, instead of October 1, to comply with their stress
capital buffer requirements. It does not include results averaging. The
calculation of stress capital buffer requirements and the rest of the
supervisory stress testing process otherwise remain the same as in the
current approach.
2. Alternative 2: Current Framework With Two-Year Averaging
Under this alternative, all the elements of the current framework
are maintained except the alternative applies results averaging over
the previous two years. For firms that participate in the supervisory
stress tests every other year, the stress capital buffer requirement is
based on the most recent stress test results. This alternative differs
from the proposal in that the time to comply with a new stress capital
buffer requirement is not extended by one quarter.
3. Alternative 3: Current Framework With Three-Year Averaging
Under this alternative, all elements of the current framework are
maintained except the alternative applies results averaging over the
previous three years. For firms subject to annual supervisory stress
tests, this means that the stress capital buffer requirement in the
current year is based on the average of aggregate common equity tier 1
declines from their three most recent stress tests. For firms subject
to Category IV standards that undergo supervisory stress tests every
other year, this means that in the year that the firm is subject to the
stress test, stress capital buffer requirements are based on the
average of aggregate common equity tier 1 capital declines in the most
recent stress test and the stress test that took place two years prior.
In the year that the firm is not subject to the supervisory stress
test, stress capital buffer requirements are, in effect, solely based
on the results from the last year's test since the calculation
considers the average of only one number. Under this alternative, if a
firm does not participate in the stress test, the common equity tier 1
capital decline for that year is treated as a missing observation for
the purposes of computing the firm's stress capital buffer. This
alternative deviates from results averaging under the proposal, which
applies over a two-year period.
4. Alternative 4: Current Framework With Asymmetric Two-Year Averaging
With One-Quarter Delay
Under this alternative, all the elements of the current framework
remain the same with two exceptions: (1) a firm would have until
January 1, instead of October 1, to comply with their stress capital
buffer requirements, and (2) a firm's final stress capital buffer
requirement is informed by the current year's as well as last year's
supervisory stress test results. If a firm's maximum common equity tier
1 capital decline projected in the current year's stress test is larger
than the projected decline in the prior year's stress test, then its
stress capital buffer requirement would be based on the average of
these two results. However, if the maximum common equity tier 1 capital
decline projected in the current year's stress test is smaller than the
decline in the prior year's stress test, the firm's stress capital
buffer requirement would be based on only the current year's
supervisory stress test results. This alternative
[[Page 16852]]
deviates from the proposal, which would apply stress capital decline
averaging on a symmetrical basis.
5. Alternative 5: Current Framework With Tailored Stress Test Averaging
With One-Quarter Delay
Under this alternative, all elements of the current framework are
maintained except that (1) a firm would have until January 1, instead
of October 1, to comply with its stress capital buffer requirement, and
(2) results averaging would be applied (a) over the previous two years
for firms that go through annual supervisory stress tests; and (b) up
to three years for firms that go through supervisory stress tests once
every two years. For firms subject to annual supervisory stress tests,
this means that the stress capital buffer requirement in the current
year is based on the average of aggregate common equity tier 1 capital
declines from their two most recent stress tests. For firms subject to
Category IV standards that undergo supervisory stress tests every other
year, this means that in the year that a firm is subject to the stress
test, its stress capital buffer requirement is based on the average of
aggregate common equity tier 1 capital declines in the most recent
stress test and the stress test that took place two years prior. In the
year that the firm is not subject to the supervisory stress test, its
stress capital buffer requirements is solely based on the results from
the last year's test.\47\ This alternative deviates from results
averaging under the proposal and Alternative 2, which applies over a
two-year period for all firms. It also deviates from results averaging
under Alternative 3, which applies over a three-year period for all
firms.
---------------------------------------------------------------------------
\47\ If such a firm were to opt-in to the stress test in a year
it was not required to do so, its stress capital buffer would be
based on the stress test declines in the year it opts in and the
previous year's stress test; in the subsequent year, its stress
capital buffer would be based on the stress test from that year and
the test it opted in.
---------------------------------------------------------------------------
Question 25: Are there are other reasonable alternatives that the
Board should consider in the Economic Analysis? What would the key
benefits and costs of such alternatives be?
D. Analysis of Benefits and Costs
This section provides an assessment of the benefits and costs of
the proposal and alternatives relative to the current framework. The
proposal and alternatives presented in the previous sections have
different costs and benefits that arise from their heterogenous
implications for the volatility of the stress capital buffer
requirement, its average level, its sensitivity to current risks, and
the timeliness of stress capital buffer requirement revisions.
1. Estimated Changes in Stress Capital Buffer Requirement Outcomes
Under the Proposal and the Alternatives
The Board recalculated stress capital buffer requirements using
historical data to quantitatively describe what the stress capital
buffer requirement results would have been under the proposal and each
alternative. This analysis provides an understanding of how the
proposed changes would have affected capital requirements in recent
years. The results are presented in Table 1.
The analysis in Table 1 uses supervisory stress test results from
2018 to 2024.\48\ This data is used to project stress capital buffer
requirements under the proposal from 2020 to 2024 and compares them to
the actual stress capital buffer requirements over this period. The
sample includes all firms that received a stress capital buffer
requirement in any given year, even if that firm was not subject to the
supervisory stress test in that year. Results are presented as averages
for each firm category and for the entire sample. The table reports
average stress capital buffer requirements in percentage points,
average year-over-year absolute changes in firm-specific stress capital
buffer requirement levels in basis points, time in quarters to comply
under each alternative, and average data-to-implementation gap in
months.
---------------------------------------------------------------------------
\48\ Available on Board of Governors of the Federal Reserve
System's website at <a href="https://www.federalreserve.gov/publications/dodd-frank-act-stress-test-publications.htm">https://www.federalreserve.gov/publications/dodd-frank-act-stress-test-publications.htm</a>. The 2018-2019 stress
test results have been adjusted to reflect the stress test
assumption changes finalized in the rule that established the stress
capital buffer.
---------------------------------------------------------------------------
Under the current framework and under alternatives that do not
require averaging, a firm's stress capital buffer requirement in a
given year is calculated as the common equity tier 1 ratio decline in
the supervisory stress test plus the dividend-add on for that
particular year,\49\ and is floored at 2.5 percent. The dividend add-on
is calculated by summing four quarters of projected common dividends
and dividing that total by risk-weighted assets.
---------------------------------------------------------------------------
\49\ Firms' dividend plans impact the estimates of volatility of
the stress capital buffer. If changes in firms planned dividends
move in opposite direction of the changes in stress test results,
reliance on historical observations of the dividend add-on could
overstate volatility under an averaging approach.
---------------------------------------------------------------------------
Under an averaging approach, a firm's stress capital buffer
requirement for a given year is calculated as the average of the common
equity tier 1 capital ratio declines observed in the supervisory stress
tests of the current and previous years plus the dividend add-on for
that particular year, with the result floored at 2.5 percent.
Volatility is measured as the absolute value of the year-on-year change
in the stress capital buffer requirement.
The average data-to-implementation gap is defined as the average
time elapsed between the financial statements used for stress capital
buffer requirement calculations and the effective date of those
requirements. The stress test results published in June primarily use
financial data from the previous December, with the resulting capital
buffer becoming effective in October of the same year. This process
results in a time lag of 9 months. In contrast, a two-year averaging
regime would incorporate financial statements from both the previous
December and the December prior. This approach yields an average time
lag of 15 months, calculated as the mean of 9 months (for the most
recent data) and 21 months (for the older data). Further, extending the
effective date by one quarter would add 3 months to the data-to-
implementation gap calculation. In other words, the proposal, which
involves two-year averaging and a one-quarter delay, would yield an
average data-to-implementation gap of 18 months, calculated as the mean
of 12 months for most recent data and 24 months for the older data.
As expected, options with averaging tend to feature less stress
capital buffer requirement volatility, while options with delayed
effective dates provide firms more time to comply. Another observation
from this analysis is that the interaction of results averaging with
the 2.5 percent floor can lead to a small reduction in the overall
level of stress capital buffer requirements. Such a reduction can occur
when the requirement for a specific firm is at the 2.5 percent floor
one year and above the floor in another. This nonlinear effect affects
firms whose stress capital buffer requirements fluctuate around the 2.5
percent floor rather than those that are consistently above or equal to
the floor.\50\
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\50\ The nonlinear effect reflects a mathematical result known
as Jensen's inequality, which states that for a convex function, the
function evaluated at the average of two or more values is less than
or equal to the average of the function evaluated at those same
values.
[[Page 16853]]
Table 1--Estimated Stress Capital Buffer Requirement Outcomes Under Baseline, Proposal, and Alternatives
----------------------------------------------------------------------------------------------------------------
Average absolute
Average stress stress capital Average data-to-
capital buffer buffer requirement Time to comply implementation gap
requirement year-over-year (quarters) (months)
(percent) change (bps)
----------------------------------------------------------------------------------------------------------------
Baseline: Current Framework:
Category I................ 3.72 37 1 9
Category II-III........... 4.52 102 9
Category IV............... 3.40 48 15
Average................... 3.88 65 11
Proposal: One-quarter Delay
and Two-year Averaging:
Category I................ 3.70 21 2 18
Category II-III........... 4.36 89 18
Category IV............... 3.41 44 18
Average................... 3.82 54 18
Alternative 1: One-quarter
Delay, No Results Averaging:
Category I................ 3.72 37 2 12
Category II-III........... 4.52 102 12
Category IV............... 3.40 48 18
Average................... 3.88 65 14
Alternative 2: Two-year
Averaging, No Delayed
Effective Date:
Category I................ 3.70 21 1 15
Category II-III........... 4.36 89 15
Category IV............... 3.41 44 15
Average................... 3.82 54 15
Alternative 3: Three-year
Averaging, No Delayed
Effective Date:
Category I................ 3.74 21 1 21
Category II-III........... 4.22 53 21
Category IV............... 3.32 37 21
Average................... 3.74 39 21
Alternative 4: Asymmetric Two-
year Averaging, One-quarter
Delay:
Category I................ 3.61 25 2 18
Category II-III........... 4.21 85 18
Category IV............... 3.36 44 18
Average................... 3.73 54 18
Alternative 5: Tailored Stress
Test Averaging with One-
quarter Delay:
Category I................ 3.70 21 2 18
Category II-III........... 4.35 88 18
Category IV............... 3.32 38 22
Average................... 3.78 52 20
----------------------------------------------------------------------------------------------------------------
2. Cost and Benefit Analysis of Proposal Relative to Baseline
As shown in Table 1, the proposal reduces year-over-year changes in
a firm's stress capital buffer requirement from an average of 65 basis
points under the current framework to 54 basis points (or about 17
percent). The proposal would generally maintain the current average
level of the stress capital buffer requirement. Under the proposal, the
average stress capital buffer requirement would be 3.82 percentage
points versus 3.88 percentage points under the current framework.
Moreover, firms' estimated time to comply is one quarter more than
under the current framework and the average data-to-implementation gap
increases by seven months.
Costs:
The primary concern with this approach is the slower responsiveness
of stress capital buffer requirements to changes in firm risk profiles
and economic conditions. Averaging results over two years and
incorporating a longer gap between the estimation of stress capital
buffer requirement and their effective dates can result in a less
timely requirement.
The proposed results averaging has an uneven impact across firm
categories. While results averaging meaningfully reduces the volatility
of the stress capital buffer requirements for firms subject to annual
supervisory stress tests (as shown in Table 1), it offers minimal
reduction in volatility to firms subject to biennial supervisory stress
tests. These firms face less volatility than others in the current
framework as they are only subject to stress tests every other year.
However, this does not mean firms subject to Category IV standards do
not benefit from the proposed rule, as these firms could choose to be
subject to results averaging by participating in consecutive annual
supervisory stress tests. In addition, the one quarter delay feature of
the proposed rule applies to firms of all categories.
Benefits:
The proposed rule provides more stable capital requirements for
firms. By smoothing the impact of annual fluctuations in supervisory
stress test results, firms may be able to develop
[[Page 16854]]
more consistent long-term capital strategies. This stability could
potentially lead to more sustainable lending and other financial
intermediation practices and reduce the procyclical effects that sudden
changes in capital requirements could have on firms and the U.S.
economy. As discussed in Section 1.C of this Supplementary Information,
the proposed rule would also reduce the likelihood of firms needing to
take actions to meet a sharp increase in capital requirements.
Reduced volatility in capital requirements would mitigate the
likelihood of firms needing to raise external capital, reduce
dividends, and/or shrink balance sheets and the provision of banking
services in response to an unexpected and material increase in the
stress capital buffer requirement.
In addition, the extended timeline would further enable better
planning and decision-making by firms. With an additional three months,
firms can more thoroughly assess options for meeting their new stress
capital buffer requirements, lessening the risk of a curtailment in
credit provisioning or other services. Moreover, firms would have
additional time to retain earnings and better prepare to manage large
increases in stress capital buffer requirements before turning to
raising external financing or changing their business activities. In
the long run, this extended compliance period could potentially lead to
lower management buffers as well. As firms have more time to adjust and
plan, they may feel less pressure to maintain large discretionary
buffers to deal with stress capital buffer requirement uncertainty. The
increased predictability and reduced time pressure could allow firms to
operate with capital levels that more closely align with activities and
risk exposures, improving capital efficiency without meaningfully
affecting safety and soundness.
Question: What additional benefits or costs could be relevant for
assessing the proposal? What additional data could be relevant for
assessing such costs and benefits?
3. Cost and Benefit Analysis of Other Policy Alternatives
Alternative 1: Baseline With One-Quarter Delay, No Results Averaging
Alternative 1 maintains the benefits and costs associated with the
additional three months to meet changes in the stress capital buffer
requirement, as discussed above. Reducing year-over-year fluctuations
in capital requirements enhances predictability and stability for
firms. However, merely postponing the implementation date does not
alter the volatility of the stress capital buffer requirement. An
advantage of this alternative relative to the proposed rule is,
however, its simplicity. While maintaining the current risk sensitivity
of the stress capital buffer requirement, this extension would benefit
all firms subject to Category I-IV standards without significantly
altering the current regulatory framework.
Overall, while this alternative is expected to provide positive net
benefits compared to the baseline, it offers smaller net benefits than
the proposal.
Alternative 2: Baseline With Two-Year Averaging, No Delayed Effective
Date
Alternative 2 maintains the benefits and costs associated with
reduced volatility, as discussed above. However, it does not include
the benefits and costs related to the added time to come into
compliance with changes to the stress capital requirement.
Particularly, this alternative offers minimal advantage to firms
subject to biennial supervisory stress tests. The proposal, on the
other hand, applies the same averaging method while granting an
additional quarter to firms of all categories. The benefit of this
approach over the proposal is more timeliness in the stress capital
buffer requirement. Overall, while this alternative is expected to
provide positive net benefits compared to the baseline, it offers
smaller net benefits than the proposal.
Alternative 3: Three-Year Averaging, No Delayed Effective Date
As shown in Table 1, this alternative reduces year-over-year
changes in a firm's stress capital buffer requirement from an average
of 65 basis points under the baseline to 39 basis points (or about 40
percent), while yielding a modest decline in the aggregate level of the
stress capital buffer requirement, from an average of 3.88 percentage
points under the baseline to 3.74 percentage points. The time firms
have to comply with the new stress capital buffer requirement does not
change under this alternative relative to the baseline.
Similar to the proposal and Alternative 2, the main drawback of
Alternative 3 is reduced timeliness and sensitivity to current economic
conditions and firm risk profiles. This alternative leads to an even
higher time gap due to averaging over a longer time horizon, as shown
by an average data-to-implementation gap of 21 months. This difference
may lead to a more pronounced disconnect between regulatory
requirements and the risks on firms' balance sheets, potentially
lowering the effectiveness of the capital adequacy framework for firms.
This approach shares similar benefits as in the proposal and
Alternative 2 in that by smoothing out the impact of annual
fluctuations in stress test results, firms can develop more consistent,
long-term capital strategies that potentially lead to more sustainable
lending practices and reduce the effects that sudden changes in capital
requirements might have on the broader economy. An additional benefit
relative to the proposal and Alternative 2 is that the treatment of
firms subject to Category IV standards would be more consistent with
the approach for firms subject to Category I-III standards. These firms
would benefit from an additional reduction in the volatility of their
stress capital buffer requirements due to results averaging.
Alternative 4: Asymmetric Two-Year Averaging With One-Quarter Delay
Table 1 in this section D shows that the average year-over-year
volatility decreases from 65 basis points under the baseline to 54
basis points under this alternative (a reduction of about 17 percent).
This alternative modestly lowers the average stress capital buffer
requirement levels relative to historical values (a reduction from 3.88
percent under the baseline to 3.73 percent under this alternative). The
latter result indicates that, relative to the baseline, averaging only
when common equity tier 1 capital declines in the stress tests are
larger would lead to a lower overall level of stress capital buffer
requirements.
Further, the results in Table 1 demonstrate that this alternative
is similar in terms of reducing stress capital buffer volatility. This
similarity can be attributed to two offsetting factors. First,
asymmetric averaging does not smooth out decreases, which contribute to
volatility. Thus, this factor increases volatility relative to the
proposal. Second, the 2.5 percent floor becomes binding more frequently
under this alternative, which reduces volatility relative to the
proposal. The floor becomes binding more frequently because this
alternative lowers the average level of the stress capital buffer, as
explained above, making the floor more relevant.
Similar to the proposal, a cost of this alternative is slower
responsiveness of stress capital buffer requirements to changes in firm
risk profiles and economic conditions. Another cost of this alternative
is that applying averaging only when stress losses are steeper would
lead to modestly lower
[[Page 16855]]
stress capital buffer requirements, on average. This could slightly
lower the safety and soundness of covered firms.
An advantage of this method is its alignment with the asymmetric
costs firms face when adjusting their capital in response to changing
minimum requirements. While responding to increases in capital
requirements can be costly and challenging for firms, especially over
short periods, firms typically find it easier to adjust capital levels
downward. This alternative acknowledges this asymmetry, allowing for
more rapid capital reductions when risk decreases, while providing more
time for firms to prepare against sudden, potentially disruptive
increases in capital requirements when risks increase. As a result,
this alternative may offer a less expensive framework for firms to
manage their capital levels.
Alternative 5: Tailored Stress Test Averaging, No Delayed Effective
Date
As shown in Table 1, this alternative reduces year-over-year
changes in a firm's stress capital buffer requirement from an average
of 65 basis points under the baseline to 52 basis points (or about 20
percent), while yielding a modest decline in the aggregate level of the
stress capital buffer requirement, from an average of 3.88 percentage
points under the baseline to 3.78 percentage points. The time firms
have to comply with the new stress capital buffer requirement is
extended by one quarter under this alternative relative to the
baseline.
Alternative 5 shares the general costs and benefits of alternatives
involving averaging. An additional benefit relative to the proposal is
that firms subject to Category IV standards, which face less volatility
in the current framework as they are only subject to stress tests every
other year, would benefit from a further reduction in stress capital
buffer requirement volatility. Moreover, an advantage over the three-
year averaging for all firms (Alternative 3) is that this method
extends averaging results up to three years only to those firms subject
to biennial supervisory stress tests. Consequently, it has a
significantly smaller overall average gap between data collection and
implementation.
The downside of this alternative relative to the proposal and
alternatives that are based on two-year averaging is that for most
firms subject to Category IV standards, this alternative would reduce
the ability for a timely adjustment of stress capital buffer
requirements in response to new risks or rapid shifts in the economic
landscape.
IV. Administrative Law Matters
A. Paperwork Reduction Act Analysis
In accordance with the requirements of the Paperwork Reduction Act
(PRA) of 1995 (44 U.S.C. 3501-3521), the Board may not conduct or
sponsor, and the respondent is not required to respond to, an
information collection unless it displays a currently valid Office of
Management and Budget (OMB) control number. The Board reviewed the
information collections related to the proposed rule under the
authority delegated to the Board by OMB.
The proposed rule would not create any information collections
subject to the PRA; however, the Board proposes to revise the FR Y-14
reports to improve supervisory stress test modeling and the calculation
of stress capital buffer requirements by enhancing the collection of
information used to assess a firm's risk profile. Specifically, the
revisions would implement various changes that would isolate non-
recurring expenses and increase the granularity of data on compensation
expenses.
The Board invites public comment on the following information
collection:
(a) Whether the collection of information is necessary for the
proper performance of the Board's functions, including whether the
information has practical utility;
(b) The accuracy of the Board's estimate of the burden of the
proposed information collection, including the validity of the
methodology and assumptions used;
(c) Ways to enhance the quality, utility, and clarity of the
information to be collected;
(d) Ways to minimize the burden of the information collection on
respondents, including through the use of automated collection
techniques or other forms of information technology; and
(e) Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of services to provide information.
Proposal Under OMB Delegated Authority To Extend for Three Years, With
Revision, the Following Information Collection
Collection title: Capital Assessments and Stress Testing Reports.
Collection identifier: FR Y-14A/Q/M.
OMB control number: 7100-0341.
General description of collection: This family of information
collections is composed of the following three reports:
<bullet> The annual FR Y-14A collects quantitative projections of
balance sheet, income, losses, and capital across a range of
macroeconomic scenarios and qualitative information on methodologies
used to develop internal projections of capital across scenarios.\51\
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\51\ In certain circumstances, a firm may be required to re-
submit its capital plan. See 12 CFR 225.8(e)(4); 12 CFR
238.170(e)(4). Firms that must re-submit their capital plan
generally also must provide a revised FR Y-14A in connection with
their resubmission.
---------------------------------------------------------------------------
<bullet> The quarterly FR Y-14Q collects granular data on various
asset classes, including loans, securities, trading assets, and pre-
provision net revenue (PPNR) for the reporting period.
<bullet> The monthly FR Y-14M is comprised of three retail
portfolio- and loan-level schedules, and one detailed address-matching
schedule to supplement two of the portfolio- and loan-level schedules.
The data collected through the FR Y-14A/Q/M reports (FR Y-14
reports) provide the Board with the information needed to help ensure
that large firms have strong, firm-wide risk measurement and management
processes supporting their internal assessments of capital adequacy and
that their capital resources are sufficient, given their business
focus, activities, and resulting risk exposures. The data within the
reports are used in connection with setting firms' stress capital
buffer requirements. The data are also used to support other Board
supervisory efforts aimed at enhancing the continued viability of large
firms, including continuous monitoring of firms' planning and
management of liquidity and funding resources, as well as regular
assessments of credit risk, market risk, and operational risk, and
associated risk management practices. Information gathered in this
collection is also used in the supervision and regulation of respondent
financial institutions. Respondent firms are currently required to
complete and submit up to 17 filings each year: one annual FR Y-14A
filing, four quarterly FR Y-14Q filings, and 12 monthly FR Y-14M
filings.\52\ Compliance with the information collection is mandatory.
---------------------------------------------------------------------------
\52\ Holding companies that do not meet the materiality
thresholds described in the instructions for the FR Y-14M are not
required to file that report. This results in some holding companies
submitting less than 17 filings each year.
---------------------------------------------------------------------------
Current Actions: The proposal would modify the FR Y-14A/Q/M reports
in order to collect additional information on a firm's pre-provision
net revenue, which would improve the calculation of the firm's stress
capital buffer requirement. Specifically, the proposed revisions would
collect: (1) more granular data on compensation expenses, and (2)
information on non-
[[Page 16856]]
recurring expenses. The proposed revisions would also remove items that
are no longer needed to conduct the supervisory stress test. All
proposed revisions would be effective for the December 31, 2025, report
date.
Compensation Expenses
Total compensation expense is composed of salaries, variable pay,
and employee benefits. The compensation structure for certain business
lines, including financial advisors in a firm's wealth management
business, is generally determined as a ratio of compensable revenue,
which is a portion of total revenue attributable to the financial
advisor. As a result, the key driver of compensation change is the
amount of compensable revenue generated. During a period of economic
stress, this form of variable pay may decline quickly. This differs
from fixed compensation expenses, such as salaries, which tend to be
more stable during periods of stress because a firm may take time to
assess the severity of the downturn before determining if reductions
are appropriate.
FR Y-14Q, Schedule G (PPNR) does not currently segment the portion
of total compensation that is variable in a firm's business. Therefore,
the supervisory stress test may not adequately consider the role of
variable compensation or the correlation between compensation and
compensable revenue. To ensure that the supervisory stress test results
reflect this compensation structure, the Board proposes to add two new
items to Schedule G (items 28.F (Compensable Revenues) and 28.G
(Commissions from WM or FA activities)) to capture data on compensable
revenues and commissions on the compensable revenues. For consistency
between the FR Y-14Q and the FR Y-14A, the Board also proposes
corresponding revisions to FR Y-14A, Schedule A.7.a (PPNR Projections).
Non-Recurring Expenses
Non-recurring expenses are extraordinary or one-time expenses that
are not expected to occur in the future. These expenses are distinct
from recurring expenses which occur on a regular basis. The FR Y-14
reports do not currently adequately isolate expenses that are known to
be due to one-time events.
As non-recurring expenses are not expected to repeat in the future,
it may be appropriate to mitigate the influence of these expenses when
calculating a firm's stress capital buffer requirement. To
systematically identify non-recurring expenses related to business
divestitures and the write-down of consolidated investment entities,
the Board proposes to revise the instructions for FR Y-14Q, Schedule
G.3 (PPNR Metrics), item 47 (Non-recurring PPNR items) to better
capture these expenses. Capturing data on these non-recurring expenses
would strengthen the risk sensitivity of the supervisory stress test
since the Board would have a more comprehensive picture of a firm's
expenses and net income.
Non-Interest Income From Servicing Activities
The Board is also proposing to remove several items that capture
information related to non-interest income from servicing activities.
These items are no longer needed to conduct the supervisory stress
test. Specifically, the Board proposes to remove the following items
from FR Y-14A, Schedule A.7.a (PPNR Projections Sub-schedule) and FR Y-
14Q, Schedule G.1 (PPNR Submission Worksheet):
<bullet> Item 14.J (Servicing & Ancillary Fees);
<bullet> Item 14.K (MSR Amortization);
<bullet> Item 14.L (MSR Value Changes due to Changes in
Assumptions/Model Inputs/Other Net of Hedge Performance); and
<bullet> Item 14.M (Other).
In conjunction with these revisions, the Board proposes to revise
the instructions for item 14.I (Servicing), on Schedule A.7.a and
Schedule G, so that the instructions clearly indicate that all non-
interest income related to servicing activities should be reported in
item 14.I.
Frequency: Annually, quarterly, and monthly.
Respondents: Holding companies with $100 billion or more in total
consolidated assets, as based on (1) the average of the firm's total
consolidated assets in the four most recent quarters as reported
quarterly on the firm's Consolidated Financial Statements for Holding
Companies (FR Y-9C; OMB No. 7100-0128) or (2) the average of the firm's
total consolidated assets in the most recent consecutive quarters as
reported quarterly on the firm's FR Y-9Cs, if the firm has not filed an
FR Y-9C for each of the most recent four quarters.
Total estimated number of respondents: 35.
Total estimated change in burden: -35.
Total estimated annual burden hours: 761,804.
B. Regulatory Flexibility Act Analysis
The Board is providing an initial regulatory flexibility analysis
with respect to this proposed rule. The Regulatory Flexibility Act
(RFA) \53\ requires an agency to consider whether the rules it proposes
will have a significant economic impact on a substantial number of
small entities.\54\ In connection with a proposed rule, the RFA
requires an agency to prepare and invite public comment on an initial
regulatory flexibility analysis describing the impact of the rule on
small entities, unless the agency certifies that the proposed rule, if
promulgated, will not have a significant economic impact on a
substantial number of small entities. An initial regulatory flexibility
analysis must contain (1) a description of the reasons why action by
the agency is being considered; (2) a succinct statement of the
objectives of, and legal basis for, the proposed rule; (3) a
description of, and, where feasible, an estimate of the number of small
entities to which the proposed rule will apply; (4) a description of
the projected reporting, recordkeeping, and other compliance
requirements of the proposed rule, including an estimate of the classes
of small entities that will be subject to the requirement and the type
of professional skills necessary for preparation of the report or
record; (5) an identification, to the extent practicable, of all
relevant Federal rules which may duplicate, overlap with, or conflict
with the proposed rule; and (6) a description of any significant
alternatives to the proposed rule which accomplish the stated
objectives of applicable statutes and minimize any significant economic
impact of the proposed rule on small entities.
---------------------------------------------------------------------------
\53\ 5 U.S.C. 601 et seq.
\54\ Under regulations issued by the U.S. Small Business
Administration (SBA), a small entity includes a depository
institution, bank holding company, or savings and loan holding
company with total assets of $850 million or less. See 13 CFR
121.201. Consistent with the SBA's General Principles of
Affiliation, the Board includes the assets of all domestic and
foreign affiliates toward the applicable size threshold when
determining whether to classify a particular entity as a small
entity. See 13 CFR 121.103. As of December 31, 2024, there were
approximately 2,364 small bank holding companies, approximately 85
small savings and loan holding companies, and approximately 451
small state member banks.
---------------------------------------------------------------------------
The Board has considered the potential impact of the proposed rule
on small entities in accordance with the RFA. Based on its analysis and
for the reasons stated below, the Board believes that this proposed
rule will not have a significant economic impact on a substantial
number of small entities. Nevertheless, the Board is publishing and
inviting comment on this initial regulatory flexibility analysis. In
connection with this proposal, the Board also proposes to make changes
to the Board's reporting forms.
[[Page 16857]]
As discussed in detail above, the proposed rule would amend the
Board's capital plan rule. Specifically, the proposal would amend the
calculation of the Board's stress capital buffer requirement applicable
to certain 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 proposal would
use the average of the maximum common equity tier 1 capital declines
projected in each of the Board's prior two annual supervisory stress
tests to inform a firm's stress capital buffer requirement. The
proposal would also extend the 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
proposal would make changes to the FR Y-14A/Q/M (Capital Assessments
and Stress Testing) reports to collect additional net income data that
would improve the accuracy of the stress capital buffer requirement
calculation. The changes in the proposal are not expected to materially
affect overall capital requirements and would reduce regulatory
reporting burden.
As discussed in detail above, several statutory authorities,
including the International Lending Supervision Act of 1983,\55\
section 5(b) of the Bank Holding Company Act,\56\ the International
Banking Act,\57\ section 10(g) of the Home Owners' Loan Act,\58\ and
section 165 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act) \59\ (as amended by section 401 of the
Economic Growth, Regulatory Relief, and Consumer Protection Act \60\),
provide authority for the Board's stress testing and stress capital
buffer framework, including this proposed rule.
---------------------------------------------------------------------------
\55\ See 12 U.S.C. 3902(1); 3907(a); 3909(a)(2).
\56\ 12 U.S.C. 1844(b).
\57\ See 12 U.S.C. 3106.
\58\ See 12 U.S.C. 1467a(g)(1).
\59\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376 (2010).
\60\ Economic Growth, Regulatory Relief, and Consumer Protection
Act, Public Law 115-174, 132 Stat. 1296 (2018).
---------------------------------------------------------------------------
The International Lending Supervision Act of 1983 provides the
Board with broad discretionary authority to set minimum capital levels
for state member banks and certain affiliates of insured depository
institutions, including holding companies, supervised by the Board.\61\
Under section 5(b) of the Bank Holding Company Act, the Board may issue
such regulations and orders relating to capital requirements of bank
holding companies as may be necessary for the Board to carry out the
purposes of the Bank Holding Company Act.\62\ Foreign banking
organizations with a U.S. subsidiary bank, branch, or agency are made
subject by the International Banking Act to the provisions of the Bank
Holding Company Act in the same manner as bank holding companies; \63\
therefore, the Board is also authorized under section 5(b) of the Bank
Holding Company Act to impose these requirements on those foreign
banking organizations. Similarly, with regard to savings and loan
holding companies, section 10(g) of the Home Owners' Loan Act
authorizes the Board to issue such regulations and orders relating to
capital requirements as the Board deems necessary and appropriate to
carry out the purposes of the Home Owners' Loan Act.\64\ Moreover,
section 165 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act), as amended by section 401 of the
Economic Growth, Regulatory Relief, and Consumer Protection Act,
requires the Board to establish risk-based capital requirements for
large bank holding companies and nonbank financial companies supervised
by the Board.\65\ Additionally, section 165(i)(1) of the Dodd-Frank
Act, as amended by section 401 of the Economic Growth, Regulatory
Relief, and Consumer Protection Act, requires the Board to conduct an
annual supervisory stress test of these large firms.\66\
---------------------------------------------------------------------------
\61\ See 12 U.S.C. 3902(1); 3907(a); 3909(a)(2).
\62\ 12 U.S.C. 1844(b).
\63\ See 12 U.S.C. 3106.
\64\ See 12 U.S.C. 1467a(g)(1).
\65\ See 12 U.S.C. 5365(b)(1)(A)(i).
\66\ See 12 U.S.C. 5365(i)(1).
---------------------------------------------------------------------------
The proposed rule would apply to bank holding companies, U.S.
intermediate holding companies of foreign banking organizations, and
savings and loan holding companies, each with at least $100 billion in
total consolidated assets, as well as certain nonbank financial
companies supervised by the Board and any other bank holding company or
covered savings and loan holding company domiciled in the United States
that is made subject to the capital plan rule by order of the
Board.\67\ The proposed rule would not apply to any small entities.
Further, although the Board does not project there to be a direct
impact to reporting, recordkeeping, or other compliance requirements as
a result of the proposed rule, the Board also is proposing to revise
the FR Y-14A/Q/M (Capital Assessments and Stress Testing) reports to
refine the information collected to assess a firm's net income under
stress. These reports are submitted by firms subject to the Board's
capital plan rule requirements to which the proposed rule would apply;
thus, the changes would not impact small entities. In addition, the
Board is aware of no other Federal rules that duplicate, overlap, or
conflict with the proposed changes to the capital rule. Accordingly,
the Board believes that the proposed rule will not have a significant
economic impact on a substantial number of small banking organizations
supervised by the Board and, therefore, believes that there are no
significant alternatives to the proposed rule that would reduce the
economic impact on small banking organizations supervised by the Board.
---------------------------------------------------------------------------
\67\ There currently are no entities with less than $100 billion
in total consolidated assets subject to the capital plan rule.
---------------------------------------------------------------------------
The Board welcomes comment on all aspects of its analysis.
C. Plain Language
Section 722 of the Gramm-Leach-Bliley Act (Pub. L. 106-102, 113
Stat. 1338, 1471, 12 U.S.C. 4809) requires the federal banking agencies
to use plain language in all proposed and final rules published after
January 1, 2000. The Board has sought to present the notice of proposed
rulemaking in a simple and straightforward manner and invites comment
on the use of plain language. For example:
<bullet> Is the material organized to suit your needs? If not, how
could the Board present the proposed rule more clearly?
<bullet> Are the requirements in the proposed rule clearly stated?
If not, how could the proposed rule be more clearly stated?
<bullet> Does the proposal contain technical language or jargon
that is not clear? If so, which language requires clarification?
<bullet> Would a different format (grouping and order of sections,
use of headings, paragraphing) make the proposed rule easier to
understand? If so, what changes would achieve that?
<bullet> Is this section format adequate? If not, which of the
sections should be changed and how?
<bullet> What other changes can the Board incorporate to make the
proposed rule easier to understand?
D. Providing Accountability Through Transparency Act of 2023
The Providing Accountability Through Transparency Act of 2023 (12
U.S.C. 553(b)(4)) requires that a notice of proposed rulemaking include
the internet address of a summary of not
[[Page 16858]]
more than 100 words in length of the proposed rule, in plain language,
that shall be posted on the internet website under section 206(d) of
the E-Government Act of 2002 (44 U.S.C. 3501 note).
The proposal and such a summary can be found at <a href="https://www.regulations.gov">https://www.regulations.gov</a> and <a href="https://www.federalreserve.gov/supervisionreg/reglisting.htm">https://www.federalreserve.gov/supervisionreg/reglisting.htm</a>.
List of Subjects
12 CFR Part 225
Administrative practice and procedure, Banks, banking, Federal
Reserve System, Holding companies, Reporting and recordkeeping
requirements, Securities.
12 CFR Part 238
Administrative practice and procedure, Banks, banking, Federal
Reserve System, Holding companies, Reporting and recordkeeping
requirements, Securities.
12 CFR Part 252
Administrative practice and procedure, Banks, Banking, Capital
planning, Federal Reserve System, Holding companies, Reporting and
recordkeeping requirements, Securities, Stress testing.
Authority and Issuance
For the reasons stated in the preamble, the Board of Governors of
the Federal Reserve System proposes to amend 12 CFR chapter II as
follows:
PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
(REGULATION Y)
0
1. The authority citation for part 225 continues to read as follows:
Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1,
1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3906,
3907, and 3909; 15 U.S.C. 1681s, 1681w, 6801, and 6805.
Subpart A--General Provisions
0
2. In Sec. 225.8:
0
a. Redesignate paragraphs (d)(20) through (21) as (d)(21) through (22),
respectively;
0
b. Add a new paragraph (d)(20);
0
c. Revise paragraphs (f)(1), (2), and (4);
0
d. In paragraphs (h)(2)(ii)(A) and (B), remove the text ``fourth
through seventh'', wherever it appears and add, in its place the text
``fifth through eighth'';
0
e. Revise paragraph (h)(4)(ii)(A);
0
f. Revise paragraph (i)(1) and (i)(3)(i); and
0
g. Remove the text ``fourth'', and add, in its place the text ``fifth''
in paragraph (k)(2).
The revisions and addition read as follows:
Sec. 225.8 Capital planning and stress capital buffer requirement.
* * * * *
(d) * * *
(20) Stress capital decline means the ratio of a bank holding
company's common equity tier 1 capital to risk-weighted assets, as
calculated under 12 CFR part 217, subpart D, as of the final quarter of
the previous capital plan cycle, unless otherwise determined by the
Board, minus the lowest projected ratio of the bank holding company's
common equity tier 1 capital to risk-weighted assets, as calculated
under 12 CFR part 217, subpart D, in any quarter of the planning
horizon under a supervisory stress test.
* * * * *
(f) * * *
(1) General. (i) The Board will determine the stress capital buffer
requirement that applies under 12 CFR 217.11 pursuant to this paragraph
(f). For each bank holding company that is not a Category IV bank
holding company, the Board will calculate the bank holding company's
stress capital buffer requirement annually. For each Category IV bank
holding company, the Board will calculate the bank holding company's
stress capital buffer requirement biennially, occurring in each
calendar year ending in an even number, and will adjust the bank
holding company's stress capital buffer requirement biennially,
occurring in each calendar year ending in an odd number.
Notwithstanding the previous sentence, the Board will calculate the
stress capital buffer requirement of a Category IV bank holding company
in a year ending in an odd number with respect to which that company
makes an election pursuant to 12 CFR 252.44(d)(2)(ii). The stress
capital buffer requirement calculations described in this paragraph
will be conducted using paragraphs (f)(2)(i) or (f)(2)(ii) of this
section, as appropriate. The stress capital buffer requirement
adjustment described in this paragraph will be conducted using
paragraph (f)(4) of this section.
(ii) Unless otherwise determined by the Board, a stress capital
buffer requirement that is recalculated pursuant to paragraph (f)(3) of
this section will be calculated pursuant to the methodology in
paragraph (f)(2)(ii) of this section, except that a stress capital
buffer requirement that is recalculated following the resubmission of a
capital plan pursuant to paragraph (e)(4)(i)(B)(1) of this section will
be calculated pursuant to the methodology in paragraph (f)(2)(i) of
this section.
(2) Stress capital buffer requirement calculation. (i) For a bank
holding company that was subject to the annual supervisory stress test
in the previous calendar year, a bank holding company's stress capital
buffer requirement is equal to the greater of:
(A) The following calculation:
(1) The average of the stress capital decline of the current
capital plan cycle and either the stress capital decline of the capital
plan cycle for the previous calendar year or, if the bank holding
company's currently effective stress capital buffer requirement was
provided pursuant to paragraph (f)(3) of this section, the stress
capital decline associated with that stress capital buffer requirement;
plus
(2) The ratio of:
(i) The sum of the bank holding company's planned common stock
dividends (expressed as a dollar amount) for each of the fifth through
eighth quarters of the current planning horizon; to
(ii) The risk-weighted assets of the bank holding company in the
quarter in which the bank holding company had its lowest projected
ratio of common equity tier 1 capital to risk-weighted assets, as
calculated under 12 CFR part 217, subpart D, in any quarter of the
planning horizon under a supervisory stress test conducted in the
current capital plan cycle; and
(B) 2.5 percent.
(ii) For a bank holding company that was not subject to the annual
supervisory stress test in the previous calendar year, a bank holding
company's stress capital buffer requirement is equal to the greater of:
(A) The following calculation:
(1) The stress capital decline of the current capital plan cycle;
plus
(2) The ratio of:
(i) The sum of the bank holding company's planned common stock
dividends (expressed as a dollar amount) for each of the fifth through
eighth quarters of the current planning horizon; to
(ii) The risk-weighted assets of the bank holding company in the
quarter in which the bank holding company had its lowest projected
ratio of common equity tier 1 capital to risk-weighted assets, as
calculated under 12 CFR part 217, subpart D, in any quarter of the
planning horizon under a supervisory stress test conducted in the
current capital plan cycle; and
(B) 2.5 percent.
* * * * *
[[Page 16859]]
(4) Adjustment of stress capital buffer requirement. In each
calendar year in which the Board does not calculate a Category IV bank
holding company's stress capital buffer requirement pursuant to
paragraph (f)(1) of this section, the Board will adjust the Category IV
bank holding company's stress capital buffer requirement to be equal to
the result of the calculation set forth in paragraph (f)(2) of this
section, using the same values that were used to calculate the stress
capital buffer requirement most recently provided to the bank holding
company, except that the value used in paragraph (f)(2)(i)(A)(2)(i) or
paragraph (f)(2)(ii)(A)(2)(i) of this section, as applicable, will be
equal to the bank holding company's planned common stock dividends
(expressed as a dollar amount) for each of the fifth through eighth
quarters of the planning horizon as set forth in the capital plan
submitted by the bank holding company in the calendar year in which the
Board adjusts the bank holding company's stress capital buffer
requirement.
* * * * *
(h) * * *
(4) * * *
(ii) * * *
(A) Be effective on January 1 of the year immediately following the
calendar year in which a capital plan was submitted pursuant to
paragraph (e)(1)(ii) of this section; and
* * * * *
(i) * * *
(1) General. To request reconsideration of a stress capital buffer
requirement, provided under paragraph (h) of this section,
(specifically, the stress capital decline of the current capital plan
cycle) a bank holding company must submit a written request for
reconsideration.
* * * * *
(3) * * *
(i) A request for reconsideration must include a detailed
explanation of why reconsideration should be granted (that is, why the
stress capital decline of the current capital plan cycle should be
reconsidered). With respect to any information that was not previously
provided to the Federal Reserve in the bank holding company's capital
plan, the request should include an explanation of why the information
should be considered.
* * * * *
PART 238--SAVINGS AND LOAN HOLDING COMPANIES (REGULATION LL)
0
3. The authority citation for part 238 continues to read as follows:
Authority: 5 U.S.C. 552, 559; 12 U.S.C. 1462, 1462a, 1463, 1464,
1467, 1467a, 1468, 5365; 1813, 1817, 1829e, 1831i, and 1972; 15
U.S.C. 78l.
Subpart S--Capital Planning and Stress Capital Buffer Requirement
0
4. In Sec. 238.170:
0
a. Redesignate paragraph (d)(18) as (d)(19);
0
b. Add a new paragraph (d)(18);
0
c. Revise paragraphs (f)(1), (2), and (4);
0
d. In paragraphs (h)(2)(ii)(A) and (B), remove the text ``fourth
through seventh'', wherever it appears and add, in its place the text
``fifth through eighth'';
0
e. Revise paragraph (h)(4)(ii)(A);
0
f. Revise paragraph (i)(1) and (i)(3)(i); and
0
g. Remove the text ``fourth'', and add, in its place the text
``fifth'', in paragraph (k)(2).
The revisions and addition read as follows:
Sec. 238.170 Capital planning and stress capital buffer requirement.
* * * * *
(d) * * *
(18) Stress capital decline means the ratio of a covered savings
and loan holding company's common equity tier 1 capital to risk-
weighted assets, as calculated under 12 CFR part 217, subpart D, as of
the final quarter of the previous capital plan cycle, unless otherwise
determined by the Board, minus the lowest projected ratio of the
covered savings and loan holding company's common equity tier 1 capital
to risk-weighted assets, as calculated under 12 CFR part 217, subpart
D, in any quarter of the planning horizon under a supervisory stress
test.
* * * * *
(f) * * *
(1) General. (i) The Board will determine the stress capital buffer
requirement that applies under 12 CFR 217.11 pursuant to paragraph (f)
of this section. For each covered savings and loan holding company that
is not a Category IV savings and loan holding company, the Board will
calculate the covered savings and loan holding company's stress capital
buffer requirement annually. For each Category IV savings and loan
holding company, the Board will calculate the covered savings and loan
holding company's stress capital buffer requirement biennially,
occurring in each calendar year ending in an even number, and will
adjust the covered savings and loan holding company's stress capital
buffer requirement biennially, occurring in each calendar year ending
in an odd number. Notwithstanding the previous sentence, the Board will
calculate the stress capital buffer requirement of a Category IV
savings and loan holding company in a year ending in an odd number with
respect to which that company makes an election pursuant to Sec.
238.132(c)(2)(ii). The stress capital buffer requirement calculations
described in this paragraph will be conducted using paragraphs
(f)(2)(i) or (f)(2)(ii) of this section, as appropriate. The stress
capital buffer requirement adjustment described in this paragraph will
be conducted using paragraph (f)(4) of this section.
(ii) Unless otherwise determined by the Board, a stress capital
buffer requirement that is recalculated pursuant to paragraph (f)(3) of
this section will be calculated pursuant to the methodology in
paragraph (f)(2)(ii) of this section, except that a stress capital
buffer requirement that is recalculated following the resubmission of a
capital plan pursuant to paragraph (e)(4)(i)(B)(1) of this section will
be calculated pursuant to the methodology in paragraph (f)(2)(i) of
this section.
(2) Stress capital buffer requirement calculation. (i) For a
covered savings and loan holding company that was subject to the annual
supervisory stress test in the previous calendar year, a covered
savings and loan holding company's stress capital buffer requirement is
equal to the greater of:
(A) The following calculation:
(1) The average of the stress capital decline of the current
capital plan cycle and either the stress capital decline of the capital
plan cycle for the previous calendar year or, if the savings and loan
holding company's currently effective stress capital buffer requirement
was provided pursuant to paragraph (f)(3) of this section, the stress
capital decline associated with that stress capital buffer requirement;
plus
(2) The ratio of:
(i) The sum of the covered savings and loan holding company's
planned common stock dividends (expressed as a dollar amount) for each
of the fifth through eighth quarters of the current planning horizon;
to
(ii) The risk-weighted assets of the covered savings and loan
holding company in the quarter in which the covered savings and loan
holding company had its lowest projected ratio of common equity tier 1
capital to risk-weighted assets, as calculated under 12 CFR part 217,
subpart D, in any quarter of the planning horizon under a supervisory
stress test conducted in the current capital plan cycle; and
(B) 2.5 percent.
[[Page 16860]]
(ii) For a covered savings and loan holding company that was not
subject to the annual supervisory stress tests in the previous calendar
year, a covered savings and loan holding company's stress capital
buffer requirement is equal to the greater of:
(A) The following calculation:
(1) The stress capital decline of the current capital plan cycle;
plus
(2) The ratio of:
(i) The sum of the covered savings and loan holding company's
planned common stock dividends (expressed as a dollar amount) for each
of the fifth through eighth quarters of the current planning horizon;
to
(ii) The risk-weighted assets of the covered savings and loan
holding company in the quarter in which the covered savings and loan
holding company had its lowest projected ratio of common equity tier 1
capital to risk-weighted assets, as calculated under 12 CFR part 217,
subpart D, in any quarter of the planning horizon under a supervisory
stress test conducted in the current capital plan cycle; and
(B) 2.5 percent.
* * * * *
(4) Adjustment of stress capital buffer requirement. In each
calendar year in which the Board does not calculate a Category IV
savings and loan holding company's stress capital buffer requirement
pursuant to paragraph (f)(1) of this section, the Board will adjust the
Category IV savings and loan holding company's stress capital buffer
requirement to be equal to the result of the calculation set forth in
paragraph (f)(2) of this section, using the same values that were used
to calculate the stress capital buffer requirement most recently
provided to the covered savings and loan holding company, except that
the value used in paragraph (f)(2)(i)(A)(2)(i) or paragraph
(f)(2)(ii)(A)(2)(i) of this section, as applicable, will be equal to
the covered savings and loan holding company's planned common stock
dividends (expressed as a dollar amount) for each of the fifth through
eighth quarters of the planning horizon as set forth in the capital
plan submitted by the covered savings and loan holding company in the
calendar year in which the Board adjusts the covered savings and loan
holding company's stress capital buffer requirement.
* * * * *
(h) * * *
(4) * * *
(ii) * * *
(A) Be effective on January 1 of the year immediately following the
calendar year in which a capital plan was submitted pursuant to
paragraph (e)(1)(ii) of this section; and
* * * * *
(i) * * *
(1) General. To request reconsideration of a stress capital buffer
requirement, provided under paragraph (h) of this section,
(specifically, the stress capital decline of the current capital plan
cycle) a covered savings and loan holding company must submit a written
request for reconsideration.
* * * * *
(3) * * *
(i) A request for reconsideration must include a detailed
explanation of why reconsideration should be granted (that is, why the
stress capital decline of the current capital plan cycle should be
reconsidered). With respect to any information that was not previously
provided to the Federal Reserve in the covered savings and loan holding
company's capital plan, the request should include an explanation of
why the information should be considered.
* * * * *
PART 252--ENHANCED PRUDENTIAL STANDARDS (REGULATION YY)
0
5. The authority citation for part 252 continues to read as follows:
Authority: 12 U.S.C. 321-338a, 481-486, 1467a, 1818, 1828,
1831n, 1831o, 1831p-1, 1831w, 1835, 1844(b), 1844(c), 3101 et seq.,
3101 note, 3904, 3906-3909, 4808, 5361, 5362, 5365, 5366, 5367,
5368, 5371.
Appendix B to Part 252--Stress Testing Policy Statement
6. Amend appendix B to part 252 by removing and reserving
section 2.3.
* * * * *
By order of the Board of Governors of the Federal Reserve
System.
Ann E. Misback,
Secretary of the Board.
[FR Doc. 2025-06863 Filed 4-18-25; 11:15 am]
BILLING CODE 6210-01-P
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</html>Indexed from Federal Register on April 22, 2025.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.