On Monday, we sent clients an in-depth analysis of the latest FRB proposal to rewrite the stress-test and capital-plan rules for the largest BHCs. In it, we said that, despite being incorporated into an NPR, several aspects of the proposal are in fact final instructions to the largest BHCs and rewrites of the current rules – comments to come notwithstanding.
On Tuesday, this proved to be the case. The Federal Reserve implemented one aspect of the NPR, telling four of the BHCs that failed this year’s CCAR that they need not resubmit their capital plans. As long as they do not undertake any otherwise-impermissible capital distribution, they get a do-over in 2014 without the reputational and market-capitalization cost of yet another failed capital plan.
On Wednesday, FRB Governor Tarullo confirmed this yet again. He focused on the qualitative aspects of the stress-test and capital-plan rules, especially their governance requirements. We told clients in our analysis that test factors such as the structure of desired capital distributions would need to be adjusted even as comments were sent in. Mr. Tarullo stated that this is indeed the case, although importantly he also did not reiterate his May suggestion that the Basel III rules be abandoned in favor of simpler capital standards and these same stress tests. He did, however, state publicly what we have been advising our clients: in CCAR, it’s the FRB that counts, not the Reserve Bank.
If you would like to see this analysis or if you have any questions in this area, please respond by return e-mail. We would be happy also to arrange a time to talk with managing partner Karen Petrou on capital-governance and stress-test matters. You may also find of use the paper we provided last year on steps boards of directors must take to ensure their large BHCs are not sanctioned for poor capital plans. The FRB’s actions on the four BHCs cited above confirmed this analysis and our presentations to boards on which it is based.
If you have any questions or would like to discuss this matter, please email us at info@fedfin.com or call 202-589-0880.