Stress Testing: Is Now the Time to Move the Goal Post? | Perspectives & Events | Mayer Brown

The SCB rule largely tracks the April 2018 proposal, with certain modifications that respond to industry feedback and that reflect amendments required by the Board’s 2019 rulemaking that tailored capital requirements for larger banking organizations.6 The SCB rule applies only to banking organizations that currently are subject to the capital plan rule (i.e., US bank holding companies and US intermediate holding companies with $100 billion or more in total assets).

Under the SCB rule, a banking organization’s stress capital buffer is calculated as the sum of (i) the difference between the organization’s starting and minimum projected common equity tier 1 capital ratios as calculated under the severely adverse scenario specified in the supervisory stress test and (ii) four quarters of planned common stock dividends as a percentage of risk-weighted assets. The stress capital buffer requirement, which applies on top of an organization’s minimum risk-based capital requirement, may be no less than 2.5 percent of risk-weighted assets and replaces the 2.5 percent of risk-weighted assets portion of the capital conservation buffer requirement under the Basel III standardized approach.7 An organization whose capital ratios are at or below its minimum, taking into account its stress capital buffer requirements, the applicable global systemically important bank holding company (“G-SIB”) surcharges, and its countercyclical capital buffer is subject to automatic restrictions on capital distributions.

The SCB rule modified the CCAR exercise by reducing the number of quarters an organization will be assumed to take capital actions while under stress from nine to four. In addition, the SCB rule modified the CCAR exercise to assume that an organization will maintain a constant level of assets over the planning horizon rather than assuming a growing balance sheet over the planning horizon. Further, the SCB rule (i) removed the 30 percent dividend payout ratio currently applied as a criterion for heightened supervisory scrutiny of an organization’s capital plan and (ii) generally removed the quantitative objection process and prior approval requirement for capital distributions that comply with the capital rules.

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