A New Chapter in Stress Testing
Vice Chairman for Supervision Randal K. Quarles
As devoted readers of our capital rules may know, our regulatory capital rule includes both minimum capital requirements and a buffer that sits on top of those minimum requirements. The buffer serves as an early warning to a firm and to supervisors, and it requires the firm to reduce its capital distributions as the firm approaches the minimum requirements. Under the current capital rule, all firms are subject to a fixed buffer requirement of 2.5 percent of risk-weighted assets–the largest firms are also subject to a global systemically important bank surcharge and potential countercyclical capital buffer.
For large firms, the SCB would replace the fixed 2.5 percent risk-based buffer with a firm-specific buffer the size of which would be based on the firm’s stress test results. In this way, we are integrating the automatic restrictions on capital distributions in the current capital rule with the output of the most dynamic tool we have for assessing risk–the stress test–to create a more robust and dynamic regulatory capital regime. The SCB would also result in a more transparent and simplified system of regulatory capital requirements, because a firm will be held to a single, integrated capital regime.
The full speech is available at https://www.federalreserve.gov/newsevents/speech/quarles20181109a.htm