Banking Organization Capital Plans and Stress Tests: Federal Reserve Governor Tarullo Previews Proposal for Multiple Revisions to Capital Plans and Stress Tests That Will Increase Effective Capital Requirements for G-SIBs and May Reduce Effective Capital Requirements for Other CCAR Banking Organizations

Sullivan & Cromwell LLP - September 26, 2016

In a speech earlier today at the Yale University School of Management Leaders Forum, Federal Reserve Board Governor Daniel Tarullo previewed several impactful proposals to amend the Federal Reserve’s CCAR stress test rules and procedures and its risk-based capital rules as applicable to bank holding companies with $50 billion or more in total consolidated assets (“CCAR BHCs”).  The proposals, if implemented, would require CCAR BHCs to increase their regulatory capital levels—in some cases, and particularly for G-SIBs, substantially—if they are to avoid limitations on capital distributions and discretionary management compensation.  This change would be made, in the first instance, by replacing the capital rules’ existing 2.5 percent capital conservation buffer with a substantially larger (at least for many CCAR BHCs) “stress capital buffer.”  Additionally, the proposals would appear to require G-SIBs under supervisory stress tests in all scenarios, including the severely adverse scenario, to have post-stress capital ratios that meet minimum capital requirements plus the applicable G-SIB surcharge, not just minimum capital requirements as under current rules.  Implementation of the proposals would require amendments both to the Federal Reserve’s risk-based capital rules and to its capital plan and DFAST rules.