Stress Testing

On September 30, 2020, the Federal Reserve released a proposal to update its capital planning requirements in a number of respects, including to integrate the capital plan rule with the Federal Reserve’s October 2019 final rules tailoring its enhanced prudential standards.  The proposal would make the following notable changes:

  • Replacement of Company-Run Stress Testing for

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On October 22, 2019, the U.S. Government Accountability Office (“GAO”) issued two letters concluding that three Federal Reserve Supervision and Regulation letters, SR 12-17: Consolidated Supervision Framework for Large Financial Institutions, SR 14-8: Consolidated Recovery Planning for Certain Large Domestic Bank Holding Companies, and SR 11-7: Guidance on Model Risk Management, are “rules” under the Congressional Review Act (“CRA”) and therefore must be submitted to Congress and the Comptroller General for review before they can take effect.  The GAO letters respond to requests made by several senators for determinations of whether the three SR letters, as well as SR 15-7: Governance Structure of the Large Institution Supervision Coordinating Committee (LISCC) Supervisory Program, are rules under the CRA.  The GAO concluded that SR 15-7 is not a rule under the CRA.
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Continue Reading GAO Concludes Three SR Letters Are Rules Under Congressional Review Act

On July 9, 2019, the federal banking agencies released a final rule to simplify aspects of the regulatory capital rules for banking organizations that are not “advanced approaches” banking organizations, i.e., those with less than $250 billion in total consolidated assets and less than $10 billion in total foreign exposure.  Initially proposed in September 2017 as part of the agencies’ ongoing efforts to meaningfully reduce regulatory burden on small and mid-sized banking organizations, the final rule is intended to simplify and clarify certain aspects of the capital rules, and in particular the capital treatment of mortgage servicing assets, certain deferred tax assets, investments in the capital instruments of unconsolidated financial institutions, and minority interests.  Importantly, the Board of Governors of the Federal Reserve System (“Board”) also used the rulemaking as an opportunity to streamline an important aspect of its regulatory framework by permitting bank holding companies, savings and loan holding companies, and state member banks of all sizes to redeem or repurchase their common stock without obtaining formal, prior regulatory approval under most circumstances.
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Continue Reading Federal Reserve Rationalizes Stock Buyback Rules

On March 6, 2019, the Federal Reserve issued a final rule to exempt from the qualitative component of the Comprehensive Capital Analysis and Review (“CCAR”) exercise large firms that have participated in CCAR for four consecutive years and have passed the final year’s qualitative component without objection.  The final rule serves to provide an immediate exemption for all domestic bank holding companies currently subject to CCAR, and to phase out the qualitative objection for U.S. intermediate holding companies of foreign banks (“IHCs”).
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Continue Reading Federal Reserve Eliminates CCAR’s Qualitative Objection for Most Firms

In a November 9, 2018 speech, Federal Reserve Vice Chairman for Supervision Randal K. Quarles outlined potential adjustments to the revisions to the capital planning regime that the Federal Reserve proposed in April 2018.  Governor Quarles also said he will ask the Federal Reserve to exempt banks with less than $250 billion in assets from the Comprehensive Capital Analysis and Review (“CCAR”) quantitative assessment and supervisory stress testing in 2019 in order to facilitate capital planning moving to a biennial exercise for such banks.

Governor Quarles emphasized that the adjustments “are not intended to alter materially the overall level of capital in the system or the stringency of the regime.”  However, the cumulative impact of the changes outlined in his speech would be to ease the implementation of the SCB and streamline CCAR and capital planning.…

Continue Reading Capital Planning Framework to Continue its Evolution

Following enactment of the Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”) in May 2018, the Board of Governors of the Federal Reserve System (“FRB”), the Office of the Comptroller of the Currency (“OCC”), and the Federal Deposit Insurance Corporation (“FDIC” and collectively, the “Agencies”), have begun the process of implementing the regulatory relief required under the law.

Most recently, the Agencies issued two interim final rules under EGRRCPA, and Senate Republicans submitted a letter to FRB Vice Chairman for Supervision Randal Quarles expressing concern about recent public comments by FRB leadership.

Interim Final Rule Regarding High-Quality Liquid Assets – Municipal Securities

On August 22, 2018, the Agencies issued an interim final rule to treat certain municipal securities as high-quality liquid assets. EGRRCPA required the Agencies to amend their liquidity coverage ratio (LCR) rule to treat municipal obligations that are “liquid and readily-marketable” and “investment grade” as high-quality liquid assets, and the interim rule implements this requirement.…

Continue Reading Dodd-Frank Reform Update: Banking Agencies Issue Two Interim Final Rules; Senate Republicans Push for Regulatory Relief for Certain Banks

On July 16, 2018, Republican and Democratic leadership of the House Financial Services Committee announced that they have reached agreement to advance a package of financial services reforms known as the “JOBS Act 3.0,” consisting of 32 pieces of legislation that have passed the Committee or the full House with bipartisan support.

While much of the package is focused on capital markets regulation, several of the component bills relate to prudential or consumer financial services matters.…

Continue Reading House Committee Agrees on JOBS Act 3.0

On December 7, 2017, the Federal Reserve released three proposals that would increase the transparency of its stress test exercises, including the Dodd-Frank Act Stress Tests (“DFAST”) and Comprehensive Capital Analysis and Review (“CCAR”).  The proposals are comprised of: (1) enhancements to the Federal Reserve’s disclosures regarding its stress test models, (2) amendments to the Federal Reserve’s Policy Statement on the Scenario Design Framework, and (3) adoption of a new policy statement on the Federal Reserve’s approach to developing, implementing, and validating models.  Comments on the three proposals are due by January 22, 2018.

The Federal Reserve’s proposals represent a substantial step toward more transparency in stress testing, but would not provide for full disclosure of the agency’s models.  The preambles to the proposals suggest that the Federal Reserve is seeking to balance the benefits of additional disclosure, including increased public and market confidence in the stress test process, with concerns over the possibility that full disclosure would allow DFAST and CCAR participant firms to “game the system” by shifting their businesses to activities that appear to be advantaged under the models, which in turn could create systemic risk by leading to increased correlations among large firms’ asset holdings.  Each of the three proposals is discussed below.…

Continue Reading Federal Reserve Proposes to Increase Stress Test Transparency

Senators Jon Tester, D-Mont., and Jerry Moran, R-Kan., introduced a bill today (S. 1139) that would raise the threshold for a banking organization to be subject to Dodd-Frank Act Stress Tests (DFAST) to $50 billion in total consolidated assets from the current $10 billion threshold.  The bill, titled the Main Street Regulatory Fairness Act, would…

On Tuesday, the Government Accountability Office (“GAO”) issued a report to the House Financial Services Committee (the “Report”) regarding stress tests conducted by the Board of Governors of the Federal Reserve System (the “Fed”).

The Report grew out of a 2014 request from Rep. Jeb Hensarling, Chairman of the House Financial Services Committee, for the GAO to review the Fed’s stress test program because he was concerned that the Fed was not adequately transparent with the banks and the public about the program’s procedures and standards. In response to the request, the GAO conducted a comprehensive review of the Fed’s stress test program that included a review of Fed  rules, guidance, internal policies and procedures, and interviews with Fed staff and officials from 19 banking institutions.

In the final Report, the GAO recommends that the Fed make several changes to its stress test procedures, including increasing transparency with respect to qualitative assessments, evaluating a broader range of severe stress scenarios, and doing more to assess uncertainty associated with the Fed’s internal models for determining the test results.
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Continue Reading GAO Issues Report on Fed Stress Tests