Stress Testing: Is Now the Time to Move the Goal Post? | Perspectives & Events | Mayer Brown
It is not clear at this point whether the Board will adjust the standards it uses to evaluate the submissions or whether banking organizations will be required to revise or make resubmissions. The Board has moved away from using qualitative assessments as a driver of the CCAR exercise, which may indicate that the Board will adjust its quantitative analysis of financial projections.9 What is clear, however, is that the hypothetical stressed scenarios on which the financial projections are based differ substantially from the economic stresses that were triggered by the COVID-19 pandemic.
The Board’s deadline to announce the results of the test, and to object to any proposed capital plans, is June 30, 2020.10
Takeaways
The SCB rule reduces the number of capital requirements certain banking organizations must meet from 13 to eight and generally should reduce the amount of capital that Category II, III, and IV banking organizations (i.e., non-G-SIB large banking organizations) must hold. While the SCB rule is effective May 18, 2020 (and therefore, will be effective for the supervisory stress testing component of the 2020 CCAR cycle), the modified capital requirements will not apply until October 1, 2020.11 This phased approach may mitigate some of the financial uncertainty associated with introducing new rules while the CCAR exercise is underway.12
The inclusion of COVID-19 into the Board’s evaluation of stress testing results and proposed capital plans will apply retroactively to the materials submitted last week by banking organizations. It remains unclear what standards the Board will use to evaluate the COVID-19 stress scenario.
***
If you wish to receive regular updates on the range of the complex issues confronting businesses in the face of the novel coronavirus, please subscribe[1] to our COVID-19 “Special Interest” mailing list.
And for any legal questions related to this pandemic, please contact the authors of this article or Mayer Brown’s COVID-19 Core Response Team at FW-SIG-COVID-19-Core-Response-Team@mayerbrown.com[2].