The Federal Reserve Board ("FRB") adopted a rule that will (i) simplify the requirements for large banks subject to capital plan rules and (ii) implement a stress capital buffer requirement.

The final rule will amend capital plan rules' requirements to (i) maintain or increase the capital required for global systemically important banks ("GSIBs") and (ii) decrease the capital required for non-GSIBs.

Additionally, the FRB will tailor the stress capital buffer requirement to each firm by using the results of its supervisory stress test. This will replace the current capital conservation buffer requirement.

Prior to adoption, the FRB made several changes including:

  • not requiring a stress leverage buffer to be used when making a distinction between the capital framework's risk-based and non-risk-based capital requirements;

  • modifying the definition of "eligible retained income" to a quarterly average net income measure in order to (i) minimize the potential volatility of the stress capital buffer requirement and (ii) ensure the accuracy of distribution limitations under the capital rule;

  • revising the distribution assumptions used in the Comprehensive Capital Analysis and Review (or "CCAR") to lessen the burden on firms making planned capital distributions (e.g., common stock dividends);

  • making certain calculation adjustments for the dividend add-on in order to create greater clarity and consistency between the calculation of the dividend add-on and the stress capital buffer requirements regarding common equity tier 1 (or "CET1") ratio declines;

  • adjusting the stress test methodology to (i) assume a firm will take steps to maintain a constant level of assets, (ii) avoid the possibility of double-counting the impact of a merger or acquisition by no longer including the projected impact of material business plan changes;

  • removing the "once-a-year" quantitative objection process in order to move toward a "unified approach to capital distribution limitations"; and

  • eliminating the requirement that firms receive approval if they make capital distributions greater than those outlined in their respective capital plans.

FRB Vice Chair for Supervision Randal K. Quarles said the capital buffer implements simpler restrictions on a firm making capital distributions based on its ability to withstand stress. He said the final rule will enhance the FRB's common equity capital requirements for large banking firms.

FRB Governor Lael Brainard dissented, calling the final rule "imprudent" for decreasing the loss-absorbing capital at the center of the banking system. By implementing the final rule, Ms. Brainard warned, large banks will be allowed to reduce their capital buffers at a time when payouts have surpassed earnings for several years.

The final rule will go into effect on October 1, 2020.