On January 30, 2017, the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) released a final rule amending its capital plan and Comprehensive Capital Analysis and Review (“CCAR”) stress testing rules.

The final rule addresses the following key issues, among others:

  • Qualitative Assessments.  Under the final rule, “large and noncomplex bank holding companies” are no longer subject to the qualitative component of the annual CCAR assessment.  A large and noncomplex bank holding company is defined as any bank holding company (1) with average total consolidated assets between $50 billion and $250 billion; (2) with average total nonbank assets of less than $75 billion; and (3) that is not a global systemically important bank holding company (“G-SIB”).[1]  The Federal Reserve Board will no longer object to a large and noncomplex bank holding company’s capital plan in the annual CCAR assessment based on qualitative deficiencies; rather, the Federal Reserve Board will assess the strength of such a company’s capital planning process through the regular supervision process and targeted, horizontal assessments of capital planning.

  • De Minimis Exception for Capital Distributions. The final rule also limits the amount of capital a bank holding company may distribute to shareholders under the capital plan rule’s de minimis exception. Previously, well-capitalized bank holding companies could distribute up to 1% of their Tier 1 capital in addition to the amount allotted in their capital plans, provided certain conditions were satisfied, including notification to the Federal Reserve Board. The final rule reduces the additional amount distributable under the de minimis exception from 1% to 0.25% and subjects the exception to a “blackout period” during the second quarter when the Federal Reserve Board is conducting CCAR to review capital plans.  During this “blackout period,” a bank holding company would not be able to submit a notice regarding its intention to use the de minimis exception or a request for prior approval for any other additional capital distributions.
  • Cut-off Date for the Capital Plan Rule. The final rule moves the cut-off date for the capital plan rule from December 31 to September 30, which allows a bank holding company that crosses the $50 billion asset threshold in the fourth quarter of a calendar year to submit its first capital plan before April 5 of the second year that follows.  The final rule makes the same change to the cut-off date for determining the applicability of the Dodd-Frank Act Stress Test (“DFAST”) requirements for a bank holding company that crosses the $50 billion asset threshold.
  • Less Stringent Reporting Obligations Under FR Y-14 Forms. The final rule alleviates reporting obligations for large and noncomplex bank holding companies by increasing the materiality threshold for filing schedules on the FR Y-14Q report and the FR Y-14M report by changing the definition of material portfolios from those with assets balances greater than either $5 billion or 5% of Tier 1 capital to those with assets balances greater than either $5 billion or 10% of Tier 1 capital. The final rule also reduces the amount of supporting documentation that large and noncomplex bank holding companies must submit and no longer requires such bank holding companies to complete certain sub-schedules of the FR Y-14A Schedule A (Summary).
  • Flexibility in Selecting the Market Shock “As Of” Date. The final rule gives the Federal Reserve Board more flexibility in selecting an “as of” date for the global market shock component of company-run stress tests for bank holding companies with significant trading activity. Previously, the Federal Reserve Board was to select an “as of” date between January 1 and March 1 of the calendar year. The final rule allows the Federal Reserve Board to select an “as of date” between October 1 of the previous calendar year and March 1 of the calendar year in which the stress test is performed.

The final rule largely tracks the Federal Reserve Board’s September 2016 proposed rule, except that the final rule revises the definition of a “large and noncomplex bank holding company” by eliminating the originally proposed requirement that such bank holding company have less than $10 billion in on-balance sheet foreign exposure and replacing it with a requirement that the bank holding company is not a G-SIB.

The final rule generally is effective for the 2017 CCAR cycle, except that the change with respect to the market shock “as of” date is effective for the 2018 stress test cycle.

The preamble to the final rule also confirms the Federal Reserve Board’s intent to issue a proposal to change its capital requirements by replacing the capital conservation buffer with a “stress capital buffer,” as outlined in a September 2016 speech by Governor Daniel K. Tarullo.

[1] The final rule also applies to U.S. intermediate holding companies of foreign banking organizations.