WASHINGTON – The Federal Reserve Board will likely subject large banks to higher minimum capital levels as part of their annual stress tests than the capital requirements that have resulted from past tests, Fed Gov. Daniel Tarullo said Monday.
Speaking in a Bloomberg TV interview, Tarullo, who heads the Fed board's supervisory committee, said that in the five years since the first Comprehensive Capital Analysis and Review stress tests were undertaken in 2011, the Fed has sought ways to improve its ability to uncover systemic risks.
Tarullo said consultations with academics, banks and other stakeholders had made it clear that the stress tests should examine a bank's risk to the overall financial system in addition to its individual health and resilience. That will likely result in net higher post-stress capital requirements for banks that undergo CCAR tests, he said.
"We need to think further about enhancing the macroprudential element of the stress test, which means impact not just on the bank of a particular loss but on the financial system," Tarullo said. "Although we haven't decided exactly how to do that, I think there's a pretty good chance … that at the end of the day, whether through the incorporation of some or all of the capital surcharge as a post stress minimum, or some other mechanisms, such as ... more emphasis on shared counterparties, that there will be some net increase in the post-stress minimum capital requirements."
The Fed's annual stress test process consists of two parts: CCAR and a separate test known as the Dodd-Frank Annual Stress Test. Both run a covered bank's portfolio through hypothetical stress scenarios to see how they perform. DFAST tests a bank's portfolio against a standard management strategy, while CCAR assesses the bank's performance based on its actual management plan.
Banks cannot fail DFAST, but if a bank's capital level falls below any of the minimum requirements in the CCAR test, there can be restrictions on dividend payments or other activities.
The Fed earlier this year finalized rules requiring eight global systematically important banks, known as GSIBs, to hold an additional capital surcharge of 1% to 4.5% capital surcharge to help offset the risk of a default to the global financial system. The rules effectively require higher surcharges for banks that rely more heavily on short-term wholesale funding, which Tarullo and other regulators routinely blame as a major contributor to the 2008 financial crisis.