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

Additionally, in the final rule, the Board made the following additional changes from the April 2018 proposal. First, under the final rule, organizations will not be required to include the effect of an unconsummated material business plan change in their stress capital buffer calculation.

Second, the Board decided to not implement a stress leverage buffer requirement. This decision does not affect the existing non-stress leverage ratio requirements that apply through the regulatory capital rules.

Third, the proposal did not fully account for how the integration of stress test results could increase the likelihood that an organization would trigger limitations on capital distributions. The SCB rule attempted to remedy this cliff-effect by adopting an average of earnings as the base to calculate capital distribution limitations with respect to an organization’s stress capital buffer requirement that is beyond 2.5 percent of risk-weighted assets.

Fourth, the proposal would have retained the requirement for an organization to seek prior approval from the Board to make capital distributions in excess of the planned distributions included in the organization’s capital plan. Based on industry feedback, the Board omitted this requirement from the SCB rule (although it retained a 15-day notice requirement for such actions).

COVID-19 Considerations

On April 10, 2020, Governor Quarles announced that the Board would adjust the 2020 CCAR exercise to include consideration of how banking organizations are responding to COVID-19. This mid-cycle adjustment raises questions about how the Board will evaluate the organizations’ stress testing and capital plan submissions in light of the economic consequences of the COVID-19 pandemic.

Banking organizations seeking to comply with the timeline set forth in the Board’s capital plan rule submitted their stress test results and proposed capital plans to the Board on April 6, 2020.8 These submissions responded to hypothetical stress testing scenarios and instructions issued by the Board in early February but did not incorporate the real-world effects of COVID-19. Governor Quarles’ comments suggest that the Board will now use organizations’ stress test submissions to evaluate how their portfolios are responding to current events.

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