Letters

Proposed Amendments to the Regulatory Capital, Capital Plan and Stress Test Rules

Summary

SIFMA and other associations provided comments to the Federal Reserve System on a proposal to establish a stress buffer framework that would create a single, integrated set of capital requirements by combining the supervisory stress test results of the Comprehensive Capital Analysis and Review program and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 with the ongoing, “point-in-time” requirements of its Basel III regulatory capital rule for covered firms.

See also:

Amendments to the Regulatory Capital, Capital Plan, and Stress Test Rulesprude

PDF

Submitted To

Federal Reserve System

Submitted By

SIFMA
The Clearing House Association L.L.C.
Financial Services Roundtable

Date

25

June

2018

Excerpt

June 25, 2018

Via Electronic Mail

Ms. Ann Misback, Esq.
Secretary
Board of Governors of the Federal Reserve System
20th Street & Constitution Avenue, N.W.
Washington, D.C. 20551

Re: Proposed Amendments to the Regulatory Capital, Capital Plan and Stress Test Rules (Docket No. R-1603; RIN 7100-AF2)

Ladies and Gentlemen:

The Clearing House Association L.L.C., the Securities Industry and Financial Markets Association, and the Financial Services Roundtable (together, the “Associations”)1 appreciate the opportunity to comment on the Federal Reserve’s proposal2 to establish a stress buffer framework that would create a single, integrated set of capital requirements by combining the supervisory stress test results of the Comprehensive Capital Analysis and Review program and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 20103 with the ongoing, “point-in-time” requirements of its Basel III regulatory capital rule for covered firms.4 The Proposal represents a step forward toward much-needed measures to bring greater coherence and simplicity to the U.S. bank capital framework and to address long-standing flaws in the design and mechanics of the Dodd-Frank Act supervisory stress testing (“DFAST”) and the CCAR exercise.

To the extent that elements of the Proposal support this objective, we strongly support them. For example, the Associations strongly support the proposal to eliminate from CCAR and DFAST the currently applicable assumption that firms’ balance sheets and risk-weighted assets (“RWAs”) grow under stressed conditions.5 Under an actual stress scenario, firms’ balance sheets would be affected by a combination of effects on counterparty actions (including defaults, draw-downs on existing lines of credit and demand for new credit) as well as shocks to market prices and market-wide demand. It is unrealistic to assume that these effects would, in the aggregate, result in a firm’s balance sheet growing under stress, with a consequent growth in RWAs. As a result, removing the balance sheet and RWA growth assumptions from DFAST and CCAR, as proposed in the Proposal, is a significant and wise step towards aligning the assumptions in the supervisory stress testing framework with historical experience and empirical data.

The Associations, however, believe that further important changes to the Proposal and the capital, capital plan and stress testing framework are necessary to base it on more realistic scenarios and assumptions, reflect more accurate and updated measures of risk, and achieve the intended simplification and elimination of the quantitative objection to a firm’s capital plan for banking organizations covered by the Proposal.

Continue Reading > 

1 Descriptions of the Associations are provided in Annex A of this letter.

2 Federal Reserve, Amendments to the Regulatory Capital, Capital Plan, and Stress Test Rules, 83 Fed. Reg. 18,160 (Apr. 25, 2018) (link).

3 Pub.L. No. 111-203 (2010).

4 As proposed, the Proposal would apply to bank holding companies with $50 billion or more in total consolidated assets and U.S. intermediate holding companies (“IHCs”) of foreign banking organizations (“FBOs”) established pursuant to Regulation YY. The Associations assume that the Federal Reserve will adjust the $50 billion threshold and scope of applicability to be consistent with the recently enacted Economic Growth, Regulatory Relief and Consumer Protection Act. Pub.L. No. 115-174 (2018) (link) (“EGRRCPA”). In this letter, we use the term “pointin-time” capital requirements to distinguish between a firm’s ongoing regulatory capital requirements under the capital rule and its requirements under the stress testing rules.

5 Proposal at 18,166.