The U.S. Federal Reserve has adopted a new rule aimed at simplifying the capital requirements for large banks by integrating them with the results of the Fed’s stress tests.
The rule approved on Wednesday create a new “stress capital buffer” to determine how much banks must hold in reserve to guard against downturns. The buffer uses the results from the stress test component of the annual Comprehensive Capital Analysis and Review (CCAR) to help determine each firm’s capital requirements for the coming year.
As a result, the Fed said, a bank’s required capital levels would more closely match its risk profile and likely losses as measured via the stress tests.
“The stress capital buffer materially simplifies the post-crisis capital framework for banks, while maintaining the strong capital requirements that are the hallmark of the framework,” Fed Vice Chairman Randal Quarles said in a news release.
The simplification will also result in banks needing to meet eight capital requirements, instead of the current 13.
The final rule applies to bank holding companies and U.S. intermediate holding companies of foreign banking organizations with more than $100 billion in assets and will be in effect for the 2020 CCAR cycle. Fed staff estimate it will lead to somewhat higher capital requirements for the nation’s largest banks such as JPMorgan Chase and Citigroup and lower requirements for smaller institutions.
Large global banks are expected to have to hold, on average, 7% more loss-absorbing capital, while banks with under $700 billion in assets are expected to see a 10% reduction in those requirements, the Fed said.
Only Fed Governor Lael Brainard voted against the new rule.
“Banks worked hard to build their capital buffers following the crisis,” she said. “It is imprudent to reduce the loss absorbing capital at the core of the system at this point in the cycle, when large banks are internationally competitive, and payouts have been exceeding earnings.”