Ten key points from the Fed’s final stress capital buffer and 2020 CCAR instructions

In March 2020, the Federal Reserve (Fed) finalized a rule to implement the stress capital buffer (SCB), an institution-specific capital add-on that incorporates Fed-modeled stress test results into ongoing capital requirements − formally raising regulatory day-to-day minimum capital ratios to levels the Fed otherwise expected prudently managed banks to maintain. In implementing the SCB, the Fed will no longer object to capital plans on quantitative grounds during its annual comprehensive capital analysis and review (CCAR) but will require banks to maintain projected ratios above the new all-in minimums in the banks’ own baseline economic scenario. Relative to the April 2018 proposal, the final rule does not include the proposed companion stress leverage buffer (SLB) and removes the requirement to obtain Fed pre-approval to increase payouts beyond those included in the capital plan.

The Fed also released its 2020 CCAR instructions last week, which explain the incorporation of the SCB into this year’s test, clarify the treatment of the current expected credit loss (CECL) accounting changes, and confirm that the qualitative objection will be phased out by next year for the few firms that are still subject to it (as long as they do not receive an objection this year).

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