On September 30, 2020, the Federal Reserve released a proposal to update its capital planning requirements in a number of respects, including to integrate the capital plan rule with the Federal Reserve’s October 2019 final rules tailoring its enhanced prudential standards.  The proposal would make the following notable changes:

  • Replacement of Company-Run Stress Testing for Category IV Institutions. For Category IV institutions, the proposal would remove the capital plan rule’s current requirement to calculate estimates of projected revenues, losses, reserves, and pro forma capital level using scenarios provided by the Federal Reserve.  The proposal would also streamline FR Y-14A reporting requirements for Category IV institutions by eliminating the requirement for these institutions to submit certain reporting forms through which institutions currently report their company-run stress test results (e., Schedule A – Summary, Schedule B – Scenario, Schedule F – Business Plan Changes, and Appendix A – Supporting Documentation).  However, this relief would be tempered by the fact that the Federal Reserve would nonetheless require Category IV institutions subject to the capital plan rule to provide a forward-looking analysis of income and capital levels under expected and stressful conditions in a stress scenario designed by the institution, with those projections tailored to the institution’s exposures, activities, and idiosyncratic risks.
  • Clarity Regarding Application of Stress Capital Buffer (“SCB”) to Category IV Institutions. Under the final tailoring rules, Category IV institutions are subject to supervisory stress testing every other year.  The proposal would clarify that the Federal Reserve will calculate the stress loss component of a Category IV institution’s SCB biennially, in the years in which the stress test occurs.  During an “off” year in which a Category IV institution does not undergo a supervisory stress test, the institution would receive from the Federal Reserve an updated stress capital buffer requirement that reflects the institution’s updated planned common stock dividends, and its calculated stress losses from the prior year’s exercise.  The proposal would, however, allow a Category IV institution to elect to participate in the supervisory stress test in an “off” year in order to receive a stress capital buffer requirement based on an updated stress loss component.
  • Opening Guidance to Public Comment. The proposal solicits comment on important Federal Reserve guidance that pertains to capital planning, including Supervision and Regulation letters 15-18, 15-19, and 09-4.  Rather than propose any specific changes or solicit comment on any specific approaches, the request for comment is entirely open-ended, and thus gives no indication as to whether or how the Federal Reserve might revise that guidance.  Each of the SR letters up for comment uses criteria for identifying which institutions are subject to the guidance that differ substantially with the categories the Federal Reserve adopted in the final tailoring rules.  Together, the open-endedness and lack of detail suggest that any changes to the guidance could take substantial time to be formulated, finalized, and put into practice at the supervisory level.
  • Request for Comment on Applying Capital Plan Rule to Covered Savings and Loan Holding Companies. The preamble to the proposal notes that the Federal Reserve is considering whether to apply the capital plan rule and SCB requirement to large SLHCs in the same manner as BHCs, and requests comment on whether it should do so on a mandatory or optional basis.

Comments on the proposal are due November 20, 2020.

Photo of Jeremy Newell Jeremy Newell

Jeremy Newell represents a wide range of U.S. and foreign banks and other financial institutions on regulatory and public policy matters. He advises on all aspects of the regulatory framework for foreign and domestic financial institutions, including control of supervised banks, structuring of…

Jeremy Newell represents a wide range of U.S. and foreign banks and other financial institutions on regulatory and public policy matters. He advises on all aspects of the regulatory framework for foreign and domestic financial institutions, including control of supervised banks, structuring of new products and investments, regulatory compliance matters, and mergers, acquisitions, and other strategic transactions. His practice also focuses on assisting financial institutions on compliance with international capital and liquidity standards and other strategic regulatory policy matters.

Prior to joining Covington, Mr. Newell served as Executive Vice President, General Counsel & Chief Operating Officer at the Bank Policy Institute (BPI), and held similar roles at its predecessor organization, The Clearing House Association (TCH), where he oversaw regulatory affairs, strategy, and advocacy. He also previously served as counsel in the Legal Division and then regulatory policy advisor in the Banking Supervision & Regulation Division to the Board of Governors of the Federal Reserve System, where he developed and implemented financial regulatory policy with a focus on issues affecting large complex financial institutions, including implementation of significant aspects of the Dodd-Frank Act and Basel III, negotiation of international standards for large banks, and other prudential regulatory policy issues. He also advised clients in private practice and as in-house counsel to two prominent financial institutions, one based in the United States and one based in the European Union, and is a frequent speaker, writer, and teacher on U.S. bank regulation and international regulatory policy for financial institutions.