Rob Nichols, president and CEO of ABA, which has for years sought reforms to the CCAR process, said:
We appreciate the Fed’s efforts to examine the stress test process and seek improvements. We’ve long believed CCAR is a bad fit for regional banks, which include different-sized institutions with a variety of business models and unique geographic footprints.Nichols called for further regulatory tailoring, including congressional action to remove stress tests requirements for banks with as little as $10 billion in assets.
The Fed’s proposal, announced by Fed Governor Daniel Tarullo, comes in response to arguments from ABA that the CCAR process was proving costlier to the smaller banks in its purview than the supervisory value it produced. Tarullo said:
Officials from these banks expressed the view that the CCAR qualitative assessment was unduly burdensome because it created pressure to develop complex processes, extensive documentation, and sophisticated stress test models that mirrored those in use at the largest, most complex firms.
Tarullo also said the Fed is considering a future proposal to replace the existing 2.5% countercyclical capital buffer with a “stress capital buffer” as part of the CCAR process. The SCB would be at least 2.5% but would vary to match the maximum decline in a firm’s common equity tier 1 capital ratio under the stress test’s “severely adverse” scenario, with “significant increases” in capital anticipated for the eight U.S. institutions designated as global systemically important banks.
We will carefully evaluate the [SCB] concept. [We have concerns] that it may not preserve the proper function of a capital buffer – to absorb losses in a stressful period – and instead could impose unnecessarily high capital requirements that would make it harder for banks to make loans that help our economy grow.
Read the proposed rule.
Read the speech.