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Fed proposing partial CCAR exemption, increased capital requirements for G-SIBs

The Federal Reserve will propose stress test reductions forbanks under $250 billion in assets and larger capital requirements for thebiggest banks, Fed Governor Daniel Tarullo said.

Tarullo said the Fed will release a notice of proposed rulemakingSept. 26 that would exempt certain banks with less than $250 billion in assetsfrom the qualitative review within the annual Comprehensive Capital Analysisand Review process. As long as the bank does not have more than $10 billion inon-balance sheet foreign exposure and $75 billion in total consolidated nonbankassets, the bank would only be subject to quantitative stress tests and stresscapital rules. This change would be effective for the next CCAR cycle in 2017.

Changes are also under consideration for the CCARcalculation for stress capital, which Tarullo said "sits a bit uneasilyalongside the ongoing capital requirements." The Fed is proposing adynamic "stress capital buffer" approach that would replace theexisting and uniform 2.5% capital conservation buffer. The buffer, which has afloor of 2.5% and would be recalculated after each year's stress test, wouldalso require held capital to account for planned dividends over the course of ayear.

The buffer would equal the maximum decline in a bank'scommon equity Tier 1 capital ratio under the Dodd-Frank Act stress test'sseverely adverse scenario — before the inclusion of capital distribution plans.A capital plan would be rejected if the bank went below this buffer in thestress test's baseline projections.

The revisions to the stress capital rules target globalsystemically important banks that would be likely to have higher G-SIBsurcharges, requiring a larger safety net in the event of distress or failure.As far as other CCAR firms without capital surcharges, Tarullo said he expectedsome reduction in their overall capital requirements.

In his speech, Tarullo also mentioned that the Fed isevaluating a reassessment of the macroprudential calculations in their stresstesting model. Proposed revisions would reduce the severity of the unemploymentrate in stress-testing scenarios in addition to controlling house prices fordisposable personal income.

The $250 billion qualitative CCAR exemption is proposed forimmediate implementation by the next CCAR cycle in 2017. The proposal alsoincludes a rule that would decrease the amount of capital distributions allowedoutside of an approved capital plan, lowering the total distribution amount to0.25% of Tier 1 capital from its current allowance of 1%.