TCH Files Comment Letter on Fed’s Stress Buffer Requirements Proposal

TCH Files Comment Letter on Fed’s Stress Buffer Requirements Proposal

On June 26, The Clearing House (TCH) filed a comment letter responding to the Federal Reserve’s stress buffer requirements proposal, which would create a single, integrated set of capital requirements by harmonizing the Federal Reserve’s stress testing regime and Dodd Frank Act requirements with the point-in-time requirements of the Basel III capital standards.

TCH is supportive of the proposal’s modifications to bring greater coherence and simplicity to the U.S. bank capital framework and to address long-standing flaws in the design and mechanics of the stress testing frameworks, including the elimination of the assumption that firms’ balance sheet and risk-weighted assets grow under stress conditions and the modification of the common stock dividend and share repurchase assumptions.

TCH’s letter also provides a range of suggestions for further improving the stress buffer requirements proposal, including: (i) to address the volatility of estimated stress losses, there should be increased transparency of supervisory models, a public notice-and-comment period for stress scenarios, and realistic scenario parameters for supervisory scenario design (ii) the final stress buffer requirements should not include an additional component for four quarters of planned common dividends in light of the payout restrictions under the Federal Reserve’s capital rule, (iii) the proposal should be amended to take into account the different circumstances of U.S. IHCs of FBOs;(iv) the capital plan rule should be amended to fully eliminate any residual basis for a quantitative limitation on capital distributions, (v) the stress buffer requirements should not take effect less than one year after initial notice, and should not include risk-insensitive capital measures; (vi) the FRB should fundamentally reassess the framework and calibration of the GSIB surcharge, and (vii) the SCB renders it unnecessary to deploy the CcyB.

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The views expressed do not necessarily reflect those of the Bank Policy Institute’s member banks, and are not intended to be, and should not be construed as, legal advice of any kind.