U.S. Fed to reconsider ‘stress capital buffer’ plan: official

By Pete Schroeder and Michelle Price

WASHINGTON (Reuters) – Randal Quarles, head of supervision at the Federal Reserve, said on Friday the central bank would re-propose aspects of a capital rule known as the “stress capital buffer” due to industry concerns.

Speaking at a conference in Washington, Quarles said the regulator should also ease a key element of its annual stress tests that allows the regulator to fail firms on operational grounds. The changes are part of a broader Fed effort to streamline its stress-testing process, a post-crisis tool that banks say have become far too onerous.

The Fed proposed a “stress capital buffer” (SCB) in April, an effort to shift the Fed’s stress testing regime to fall more in line with its traditional supervisory work, and make its requirements more flexible to address each firm’s specific characteristics.

But in response to industry comments, Quarles said the Fed would rethink several portions of the plan to make it simpler for banks.

The changes under consideration by the Fed are aimed at making the future supervisory and capital regime for banks simpler and more predictable.

He pitched a number of significant changes to how the Fed evaluates the strength of a bank’s operations during times of crisis. He said the Fed is considering a change that would allow a bank to learn how it fared under the Fed’s evaluation before building a capital distribution plan. This would reverse the current regime where banks must pitch capital plans to the Fed for approval, which has been a point of stress for banks given the public nature of the approval or rejection.

He also said the Fed was considering scrapping leverage requirements proposed as part of the stress capital buffer, and was working to reduce the volatility of stress test results now that banks have built up significant capital reserves following the 2007-2009 financial crisis.

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