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Federal Reserve Final Rule on Capital Plan, Stress Test

The Board of Governors of the Federal Reserve System adopted a final rule to make targeted amendments to its capital plan and stress test rules. All the changes indicated in the final rule will be effective on January 1, 2016, the beginning of the next capital planning and stress test cycle.

Federal Reserve

Two key components of the Federal Reserve supervisory framework

Capital Planning and Stress Testing are the two primary components of the supervisory framework of the Federal Reserve Board for large financial companies.

The framework has two related components: the Comprehensive Capital Analysis and Review (CCAR) under the capital rule (12 CFR 225.8) and stress testing under the stress test rules (subparts E and F of Regulation YY) of the Federal Reserve Board and section 165(i) of the Dodd-Frank Act.

Bank holding companies with total consolidated assets of $50 billion or more (large bank holding companies) are required to submit capital plans to the Federal Reserve Board under the CCAR.

The Federal Reserve Board will evaluate the capital planning processes and the ability of the large bank holding companies to maintain sufficient capital to continue operations under stressful conditions.

Under the Dodd-Frank Act, which complements the CCAR, the Federal Reserve Board is required to perform annual supervisory stress test at large bank holding companies. These banks are also required to conduct annual and mid-cycle company-run stress tests.

Additionally, Bank holding companies with total consolidated assets of more than $10 billion but less than $50 billion, saving and loan holding companies with more than $10 billion in consolidated assets, and state member banks with more than $10 billion in total consolidated assets are required to conduct company-run stress tests under Dodd-Frank Act.

Amendments to capital plan and stress test rules

According to the Federal Reserve, the final rule amends certain mandatory capital action in the stress test rules for bank holding companies with more than $10 billion but less than $50 billion in total consolidated assets and savings as well as loan holding companies with more than $10 billion in total consolidated assets.

The amendments included the following:

  • Modification of mandatory dividend assumptions
  • Modification to the mandatory capital action issuance assumptions
  • Company run stress test transition provisions for certain savings and loan holding companies

The final rule also delays that application of the company-run stress test requirements for savings and loan holding companies until January 1, 2017

The Federal Reserve also stated that the final rule delays the use of supplementary leverage ratio for one year and indefinitely defers the use of advanced approaches risk-based capital framework in the capital plan and stress test rules. These delays are intended for bank holding companies with total consolidated assets of $50 billion or higher and state member banks subject to the Federal Reserve Board’s advanced approaches for capital requirements.

Additionally, the final rule also removes the tier 1 common capital ratio requirement for bank holding companies with total consolidated assets of $50 billion or more. The final rule also amends certain mandatory capital action assumptions for such bank holding companies.

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