September 5, 2019 / 9:53 AM / a year ago

U.S. Fed to unveil further changes to 'stress capital buffer' plan: Quarles

Randal Quarles, vice chairman for Supervision of the Federal Reserve Board of Governors, listening to opening statements as he testifies before a Senate Banking Committee hearing titled, “Oversight of Financial Regulators” on Capitol Hill in Washington, U.S., May 15, 2019. REUTERS/Jonathan Ernst

WASHINGTON (Reuters) - Randal Quarles, head of supervision at the Federal Reserve, said on Thursday the U.S. central bank is preparing to further simplify a pending bank capital rule known as the “stress capital buffer,” following industry concerns.

In remarks prepared for delivery in Frankfurt, Quarles said the Fed should remove two specific bank requirements - a stress leverage buffer and a requirement that banks pre-pay for a year’s worth of planned dividends - saying they are unnecessary and redundant. Both were originally included in an April 2018 rule proposal.

Instead, Quarles proposed a broader rethinking of the proposal, and potentially integrating another tool in the Fed’s arsenal as a way to manage how much banks should hold in capital as the economy changes.

While scrapping those two requirements, he suggested the Fed raise the baseline level for its countercyclical capital buffer, a tool used by central banks worldwide to direct banks to hold more capital during times when the economy may be overheating. The Fed currently has its buffer set at zero percent, but Quarles argued that a higher baseline would give the Fed more flexibility to adjust bank capital levels across the economic cycle. He said the United Kingdom’s approach, which relies on a 1% baseline, is “quite compelling.”

Alternatively, Quarles said the Fed could simply increase the minimum capital it requires banks to hold after undergoing annual stress tests. It would be a simpler and more predictable approach, but could lead to some firms that suffer relatively small losses during tests to still have to hold higher amounts of capital, he said.

Quarles’s outline is a mixed bag for banks, as he calls for eliminating restrictions they disliked while pushing replacement policies that would still lead to banks holding more capital.

His remarks came after the Fed has been reconsidering its broad overhaul of capital rules and stress testing for over a year. The Fed proposed its “stress capital buffer” plan over a year ago, and envisioned it as a way to combine its stress testing standards with separate capital requirements, streamlining the process and allowing the regulator to customize capital standards for each firm.

However, Quarles announced in July 2018 that the Fed was rethinking the proposal after receiving pushback from banks that wanted to see an even simpler rule.

The project has laid dormant since then. Quarles said Thursday he hoped to solicit comments on the proposed changes “in the near future,” and hoped to have a new framework for the 2020 stress tests, which will be released in June.

Reporting by Pete Schroeder; Editing by Leslie Adler and Andrea Ricci

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