WASHINGTON, Nov. 9 (Xinhua) — U.S. Federal Reserve (Fed) would reconsider its new “stress capital buffer” (SCB) proposal due to financial industry’s concerns, Fed’s Vice Chairman for Supervision Randal Quarles said on Friday.
Speaking at a think tank in Washington, D.C., Quarles explained the Fed’s current regulations to ensure adequate capital in U.S. banking firms, as well as its new SCB proposal which the Fed had brought up in April.
According to the Fed, the new SCB proposal would make the Fed’s capital adequacy requirement more flexible by addressing each firm’s specific financial characteristics with their stress test results.
A stress test is a method to evaluate a bank’s capital adequacy under hypothetical unfavorable economic scenarios, such as a deep recession or a financial crisis.
During his speech, Quarles also addressed some of the firms’ concerns over the new SCB proposal.
“One concern frequently expressed is that the results of the supervisory stress test can lead to capital requirements that change significantly from year to year,” said Quarles, “which limits a firm’s ability to manage its capital effectively.”
Quarles admitted that the Fed’s stress test will differ year-over-year based on macroeconomic conditions and risks. He also said the Fed is working on reducing the volatility of stress test results.
Addressing another major concern over the new SCB proposal, Quarles said he would talk to other Fed policymakers to provide the firms stress test results before they finalize their dividends plans.
“Currently, and under the SCB proposal, a firm must decide whether to increase or decrease its planned dividends and share repurchases for the upcoming year without knowledge of a key constraint: the results of the stress test,” said Quarles.
If a firm’s planned dividends are too high, it could fail the stress test due to a lower capital adequacy. If its planned dividends are too low, it will likely to disappoint its shareholders.
Quarles also said that he expects the Fed will start to disclose some of additional detail about supervisory stress test models in early 2019.