Usually regulatory reform and rationalization is welcome by the financial services sector. However, when such changes are made in the middle of an ongoing compliance cycle, and that cycle happens to coincide with a pandemic, the industry may ask why the regulators are moving the goal post in the middle of the Ice Bowl. In that theme, the Board of Governors of the US Federal Reserve System (“Board”) recently took two actions to change parts of its stress testing requirements that will impact the ongoing 2020 stress testing cycle.

First, on March 4, 2020, the Board finalized its stress capital buffer (“SCB”) rulemaking to integrate the regulatory capital rules with the Comprehensive Capital Analysis and Review (“CCAR”) exercise.¹ The SCB rule was finalized after the start of the 2020 CCAR cycle but will be in effect for part of that cycle.

Second, on April 10, 2020, Board Governor Randal Quarles announced that the Board would change the 2020 CCAR exercise to include consideration of how banking organizations are responding to COVID-19.² This change was announced in the middle of the exercise, after organizations had submitted the results of the Dodd-Frank Act stress tests and their capital plans to the Board for non-objection.

Below we discuss the changes made by the SCB rule and the inclusion of COVID-19 in the 2020 CCAR exercise.

SCB Rule

Since enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), there was a concern that large banking organizations were subject to numerous and duplicative capital requirements due to changes in regulatory standards and requirements to conduct stress testing.³ In some cases, organizations were required to measure compliance against dozens of requirements.⁴ In other circumstances, a requirement that was intended to be a backstop operated as a binding constraint against new initiatives.

In April 2018, the Board proposed simplifying the capital requirement for larger banking organizations through the introduction of a stress capital buffer that would integrate and replace capital requirements in the Basel III and existing stress testing/capital planning regimes.⁵ On March 4, 2020, the Board finalized the SCB modifications and announced that they would apply to part of the 2020 CCAR cycle.