Federal Reserve Governors Daniel Tarullo and Jerome Powell warned the industry in separate public addresses back in June that the Fed may soon require the nation’s largest bank holding companies to hold significantly more capital as part of its annual stress testing.
On Monday in a speech at Yale University titled “Next Steps in the Evolution of Stress Testing,” Tarullo said the nation’s central bank has proposed reforms to the Comprehensive Capital Analysis and Review (CCAR), which is the Fed’s annual test to evaluate the largest bank holding companies’ capital planning process and capital adequacy in order to protect the country’s financial system from economic shocks similar to the 2008 crisis. Those reforms include a higher capital buffer requirement for the eight largest institutions (ranked by assets) and an exemption from the CCAR for some smaller bank holding companies.
The eight bank holding companies affected by the new capital requirements are Bank of America, Citigroup, Goldman Sachs Group, Inc., JPMorgan Chase, Morgan Stanley, Wells Fargo & Co., State Street Corp., and Bank of New York Mellon Corp. Tarullo referred to these firms as global systemically important banks, or GSIBs.
Tarullo told the audience at Yale that “in pulling this package of modifications together, we have consciously shaped them in accordance with the principle that financial regulation should be progressively more stringent for firms of greater importance, and thus potential risk, to the financial system.”
Some smaller firms will no longer be subjected to the Fed's stress testing, according to the new proposal. Tarullo announced that there will be an exemption from the CCAR for firms with less than $250 billion in assets that do not have significant international or nonbank activity. Approximately 25 regional banks will be affected by this change.
“As noted earlier, many of these firms have already met supervisory expectations,” Tarullo said. “We do not intend for less complex firms to invest in stress testing capabilities on par with the most complex firms and, given their profile, we feel these firms can maintain the progress they have made through the normal supervisory process, supplemented with targeted horizontal reviews of discrete aspects of capital planning.”
Tarullo said the Fed will provide more information on the new capital plan next year, and that the changes will not affect the stress tests in 2017, which will likely be conducted sometime during the summer.
Capital requirements for the banks have already been significantly raised since the financial crisis in 2008, which has forced the banks to evaluate whether or not they can maintain their current size and still be profitable. JPMorgan Chase, which is the largest bank in the country by assets, has already shrunk in response to the Fed raising capital requirements during normal times in 2015, according to the Wall Street Journal.
Click here to view Tarullo’s speech.