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Tuesday, December 22, 2015

Fed Seeks Comment on Countercyclical Capital Buffer Proposal

The Federal Reserve is seeking public comment on a proposed policy statement outlining the framework the Board would follow in setting the Countercyclical Capital Buffer. The proposed policy outlines several factors the Fed should consider as it evaluates settings for the buffer.

The CCyB is a tool by which the Fed can raise the capital requirements on internationally active banking organizations – typically those with assets of over $250 billion or $10 billion in on-balance sheet foreign exposures — when there is a heightened risk of above-normal losses in the future. Having such a mechanism in place allows banks to better absorb shocks to the financial system and helps moderate fluctuations in the credit supply. Once phased in, the buffer could range from 0% of risk-weighted assets in times of moderate vulnerability to a maximum of 2.5% when risk is determined to be higher. Banks failing to meet the buffer would face restrictions on capital distributions and the payment of discretionary bonuses.

Under the proposed framework, the Federal Reserve would take into account a range of financial system vulnerabilities and other factors, including leverage in the nonfinancial sector, leverage in the financial sector, maturity and liquidity transformation in the financial sector and asset valuation pressures. The Board would also monitor a number of financial and economic indicators to assess risk to financial stability. The buffer will be phased in beginning in 2016. Comments on the proposed policy statement are due Feb. 19, 2016.

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