The Federal Reserve Board this Monday proposed changes to CCAR and stress testing rules for the 2017 cycle. Governor Tarullo on the same day delivered a speech outlining significant changes to the programs to be proposed in early 2017.

Key changes to be made to the CCAR program in 2017 (proposed rule)

  • The proposal exempts “large and noncomplex firms” from the qualitative component of CCAR. Large and noncomplex firms are those with assets above $50 billion but under $250 billion, on-balance sheet foreign exposure under $10 billion, and nonbank assets under $75 billion.
  • The proposal narrows the de minimis exception to the limitation on distributions in the capital plan rule.

Key changes to stress testing and CCAR programs after 2017 (to be proposed in early 2017)

    1. Stress Capital Buffer
  • Introduces a firm-specific “stress capital buffer,” (SCB) which would be set to the maximum decline in a firm’s CET1 capital ratio under the severely adverse scenario of the supervisory stress test before including planned capital distributions. It would have a floor of 2.5%.
  • The SCB for each firm would be recalculated after each year’s stress test. A capital plan under which the firm would fall into the buffer under the stress test’s baseline projections would not be approved.
  • Any GSIB capital surcharge, as well as any countercyclical capital buffer, would be added to the SCB (along with the 4.5% Basel III minimum CET1 ratio) to arrive at the total CET1 capital ratio required to be maintained after any distributions.
  • 2. Potential Modeling Changes
  • May assume that planned dividends will continue to be paid out under stress — but only for one year — while planned share repurchases will be “reduced”
  • May assume that balance sheets and risk-weighted assets remain constant over the severely adverse scenario horizon
  • May make changes in the unemployment rate less severe during downturns
  • May tie hypothesized path of house prices to disposable personal income
  • May incorporate funding shocks, liquidity shocks, and spillovers from the default of common counterparties into models
  • 3. Public Disclosures
  • Public disclosures will include more details on components of projected net revenues of program participants