WASHINGTON — The Federal Reserve opted to include a notice-and-comment period as part of its process for requiring the biggest banks to hold additional capital against market excesses — a major concession to industry groups, which warned that lack of such a comment period might violate the law.
In a final rule published Thursday, the Fed outlined the framework by which it would adjust its countercyclical capital buffer, or CCyB. The buffer, outlined as part of the Basel III accords, gives the Fed the authority to require the largest banks to hold additional capital if it determines that excess risk is building in the system.
The intent of the buffer is to give the Fed an additional tool to cool down credit markets if they run too hot, or, by contrast, to lower the levels as markets normalize. The Fed said it could set the buffer anywhere between 0% and 2.5%, depending on prevailing market conditions.
Among the most consequential clarifications made in the final rule is a note that any adjustments to the buffer would be made "in accordance with applicable law" and that the board "expects to set the level of the CCyB above zero through a public notice and comment rulemaking, or through an order issued in accordance with the [Administrative Procedure Act] that provides each affected institution with actual notice and an opportunity for comment."
That provision comes as Greg Baer, president of the Clearing House Association, noted in his comment letter to the Fed that no such consideration was given in the proposal and that such an omission could violate the APA.
"The proposed countercyclical buffer … suffers from severe legal and conceptual problems, and its numerous and significant costs would greatly exceed any potential benefits," Baer wrote in the comment letter. "In particular, the proposal would establish a framework for future determinations about the countercyclical buffer that is procedurally deficient and conceptually flawed."
The final rule clarified several other aspects of the December proposal as well. It emphasized that the buffer would be put into place when "systemic vulnerabilities are meaningfully above normal" and that the Fed envisions only gradual adjustments. The board also noted that, in addition to ramping up the buffer when risk runs high, the Fed would also move to lower the buffer when those risks abate.
The final rule would apply based on a bank's exposures — requirements will be equivalent to the weighted average of countercyclical amounts established by the agency for the national jurisdictions where the bank has private-sector exposures.
During a phase-in period, the maximum buffer level given to U.S.-based private-sector exposures in 2016 would be 0.625%; in 2017, 1.25%; in 2018, 1.875%, and in 2019, 2.5%. The Fed says that it expects to set levels for U.S. credit exposures jointly with the Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency, which will retain jurisdiction to set buffer levels for banks they oversee. The Fed said that the purpose of the countercyclical buffer and the guiding principle for setting it is to internalize the risks in the market equally across covered institutions, not to penalize one kind of bank versus another.