[Federal Register Volume 81, Number 22 (Wednesday, February 3, 2016)]
[Proposed Rules]
[Pages 5661-5666]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-01934]
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FEDERAL RESERVE SYSTEM
12 CFR Part 217
[Docket No. R-1529]
RIN 7100 AE-43
Regulatory Capital Rules: The Federal Reserve Board's Framework
for Implementing the U.S. Basel III Countercyclical Capital Buffer
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Proposed policy statement with request for public comment.
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SUMMARY: The Board is inviting public comment on a policy statement on
the framework that the Board will follow in setting the amount of the
U.S. countercyclical capital buffer for advanced approaches bank
holding companies, savings and loan holding companies, and state member
banks under the Board's Regulation Q (12 CFR part 217).
DATES: Comments must be received on or before March 21, 2016. Comments
were originally due by February 19, 2016.
ADDRESSES: You may submit comments, identified by Docket No. R-1529 and
RIN 7100 AE-43 by any of the following methods:
Agency Web site: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.aspx.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
[[Page 5662]]
Email: [email protected]. Include the
docket number and RIN number in the subject line of the message.
Fax: (202) 452-3819 or (202) 452-3102.
Mail: Robert V. Frierson, Secretary, Board of Governors of
the Federal Reserve System, 20th Street and Constitution Avenue NW.,
Washington, DC 20551.
All public comments will be made available on the Board's Web site
at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.aspx as
submitted, unless modified for technical reasons. Accordingly, your
comments will not be edited to remove any identifying or contact
information. Public comments may also be viewed electronically or in
paper form in Room MP-500 of the Board's Martin Building (20th and C
Streets NW., Washington, DC 20551) between 9 a.m. and 5 p.m. on
weekdays.
FOR FURTHER INFORMATION CONTACT: William Bassett, Deputy Associate
Director, (202) 736-5644, or Rochelle Edge, Deputy Associate Director,
(202) 452-2339, Office of Financial Stability Policy and Research; Sean
Campbell, Associate Director, (202) 452-3760, Division of Banking
Supervision and Regulation; Benjamin W. McDonough, Special Counsel,
(202) 452-2036, Mark Buresh, Senior Attorney, (202) 452-5270, or Mary
Watkins, Attorney, (202) 452-3722, Legal Division.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
II. Proposed Policy Statement
III. Administrative Law Matters
A. Use of Plain Language
B. Paperwork Reduction Act Analysis
C. Regulatory Flexibility Act Analysis
I. Background
The Board of Governors of the Federal Reserve System (Board) issued
in June 2013 a final regulatory capital rule (Regulation Q) in
coordination with the Office of the Comptroller of the Currency (OCC)
and the Federal Deposit Insurance Corporation (FDIC) to strengthen
risk-based and leverage capital requirements applicable to insured
depository institutions and certain depository institution holding
companies (banking organizations).\1\ Among the changes that Regulation
Q introduced was the institution of a countercyclical capital buffer
(CCyB) for large, internationally active banking organizations.\2\
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\1\ See 78 FR 62018 (October 11, 2013) (Board and OCC); 79 FR
20754 (April 14, 2014) (FDIC). Regulation Q applies generally to
bank holding companies with more than $1 billion in total
consolidated assets and savings and loan holding companies with more
than $1 billion in total consolidated assets that are not
substantially engaged in commercial or insurance underwriting
activities. See 12 CFR 217.1(c)(1).
\2\ 12 CFR 217.11(b).
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The CCyB is a macroprudential policy tool that the Board can
increase during periods of rising vulnerabilities in the financial
system and reduce when vulnerabilities recede.\3\ The CCyB supplements
the minimum capital requirements and other capital buffers included in
Regulation Q, which themselves are designed to provide substantial
resilience to unexpected losses created by normal fluctuations in
economic and financial conditions. The CCyB is designed to increase the
resilience of large banking organizations when the Board sees an
elevated risk of above-normal losses. Increasing the resilience of
large banking organizations should, in turn, improve the resilience of
the broader financial system. Above-normal losses often follow periods
of rapid asset price appreciation or credit growth that are not well
supported by underlying economic fundamentals. The circumstances in
which the Board would most likely use the CCyB as a supplemental,
macroprudential tool to augment minimum capital requirements and other
capital buffers would be to address circumstances when potential
systemic vulnerabilities are somewhat above normal. By requiring
advanced approaches institutions to hold a larger capital buffer during
periods of increased systemic risk and removing the buffer requirement
when the vulnerabilities have diminished, the CCyB has the potential to
moderate fluctuations in the supply of credit over time.
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\3\ Implementation of the CCyB also helps respond to the
provision in the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act) that the agencies ``shall seek to
make such [capital] requirements countercyclical, so that the amount
of capital required to be maintained by a company increases in times
of economic expansion and decreases in times of economic
contraction, consistent with the safety and soundness of the
company.'' See 12 U.S.C. 1467a; 12 U.S.C. 1844; 12 U.S.C. 3907 (as
amended by section 616 of the Dodd-Frank Act).
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The CCyB applies to banking organizations subject to the advanced
approaches capital rules (advanced approaches institutions).\4\ The
advanced approaches capital rules generally apply to banking
organizations with greater than $250 billion in total assets or $10
billion in on-balance-sheet foreign exposure and to any depository
institution subsidiary of such banking organizations.\5\
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\4\ An advanced approaches institution is subject to the CCyB
regardless of whether it has completed the parallel run process and
received notification from its primary Federal supervisor pursuant
to Sec. 217.121(d) of Regulation Q.
\5\ 12 CFR 217.100(b)(1).
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The CCyB functions as an expansion of the Capital Conservation
Buffer (CCB). The CCB requires that a banking organization hold a
buffer of common equity tier 1 capital in excess of the minimum risk-
based capital ratios greater than 2.5 percent of risk-weighted assets
to avoid limits on capital distributions and certain discretionary
bonus payments.\6\ The CCB is divided into quartiles, each associated
with increasingly stringent limitations on capital distributions and
certain discretionary bonus payments as the firm's risk-based capital
ratios approach regulatory minimums.\7\
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\6\ 12 CFR 217.11(b)(1)(i).
\7\ 12 CFR 217.11(a).
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As described in Regulation Q, the CCyB applies based on the
location of exposures by national jurisdiction.\8\ Specifically, the
applicable CCyB amount for a banking organization is equal to the
weighted average of CCyB amounts established by the Board for the
national jurisdictions where the banking organization has private-
sector credit exposures.\9\ The CCyB amount applicable to a banking
organization is weighted by jurisdiction according to the firm's risk-
weighted private-sector credit exposures for a specific jurisdiction as
a percentage of the firm's overall risk-weighted private-sector credit
exposures.\10\
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\8\ 12 CFR 217.11(b)(1). The Board may adjust the CCyB amount to
reflect decisions made by foreign jurisdictions. See 12 CFR
217.11(b)(3).
\9\ 12 CFR 217.11(b)(1).
\10\ Id.
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Regulation Q established the initial CCyB amount with respect to
private-sector credit exposures located in the United States (U.S.-
based credit exposures) at zero percent. Following a phase-in period,
the amount of the CCyB will vary between 0 and 2.5 percent of risk-
weighted assets. Under the phase-in schedule, the maximum potential
amount of the CCyB for U.S.-based credit exposures is 0.625 percentage
points in 2016, 1.25 percentage points in 2017, 1.875 percentage points
in 2018, and 2.5 percentage points in 2019 and all subsequent
years.\11\ To provide banking organizations with sufficient time to
adjust to any change to the CCyB, an increase in the amount of the CCyB
for U.S.-based credit exposures will have an effective date 12 months
after the determination, unless the Board determines that a more
immediate implementation is necessary based on
[[Page 5663]]
economic conditions.\12\ In contrast, Regulation Q states that a
decision by the Board to decrease the amount of the CCyB for U.S.-based
credit exposures would become effective the day after the Board decides
to decrease the CCyB or the earliest date permissible under applicable
law or regulation, whichever is later.\13\ The amount of the CCyB for
U.S.-based credit exposures will return to 0 percent 12 months after
the effective date of any CCyB adjustment, unless the Board announces a
decision to maintain the current amount or adjust it again before the
expiration of the 12-month period.\14\
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\11\ 12 CFR 217.300(a)(2).
\12\ 12 CFR 217.11(b)(2)(v)(A).
\13\ 12 CFR 217.11(b)(2)(v)(B).
\14\ 12 CFR 217.11(b)(2)(vi).
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The Board expects to make decisions about the appropriate level of
the CCyB on U.S.-based credit exposures jointly with the OCC and FDIC.
In addition, the Board expects that the CCyB amount for U.S.-based
credit exposures would be the same for covered insured depository
institutions as for covered depository institution holding companies.
The CCyB is designed to take into account the broad macroeconomic and
financial environment in which banking organizations function and the
degree to which that environment impacts the resilience of the group of
advanced approaches institutions. Therefore, the Board's determination
of the appropriate level of the CCyB for U.S.-based credit exposures
would be most directly linked to the condition of the overall financial
environment rather than the condition of any individual banking
organization. But, the overall CCyB requirement for a banking
organization will vary based on the organization's particular
composition of private sector credit exposures located across national
jurisdictions.
II. Proposed Policy Statement
The proposed policy statement (Policy Statement) describes the
framework that the Board would follow in setting the amount of the CCyB
for U.S.-based credit exposures. The framework consists of a set of
principles for translating assessments of financial-system
vulnerabilities that are regularly undertaken at the Board into the
appropriate level of the CCyB. Those assessments are informed by a
broad array of quantitative indicators of financial and economic
performance and a set of empirical models. In addition, the framework
includes a discussion of how the Board would assess whether the CCyB is
the most appropriate policy instrument (among available policy
instruments) to address the highlighted financial-system
vulnerabilities.
The proposed Policy Statement is organized as follows. Section 1
provides background on the proposed Policy Statement. Section 2 is an
outline of the proposed Policy Statement and describes its scope.
Section 3 provides a broad description of the objectives of the CCyB,
including a description of the ways in which the CCyB is expected to
protect large banking organizations and the broader financial system.
Section 4 provides a broad description of the factors that the Board
considers in setting the CCyB, including specific financial-system
vulnerabilities and types of quantitative indicators of financial and
economic performance, and outlines of empirical models the Board may
use as inputs to that decision. Further, section 4 describes a set of
principles that the Board expects to use for combining judgmental
assessments with quantitative indicators to determine the appropriate
level of the CCyB. Section 5 discusses how the Board will communicate
the level of the CCyB and any changes to the CCyB. Section 6 describes
how the Board plans to monitor the effects of the CCyB, including what
indicators and effects will be monitored.
The Board seeks comment on all aspects of the proposed Policy
Statement.
Question 1. In what ways could the Board improve its proposed
framework for making decisions on the CCyB?
Question 2. The proposed Policy Statement describes a set of
principles for translating judgmental assessments of financial-system
vulnerabilities into specific levels of the CCyB, a set of empirical
models used as inputs to the judgmental process that distill and
translate quantitative indicators of financial and economic performance
into potential settings for the CCyB, and an assessment of whether the
CCyB is the most appropriate policy instrument to address highlighted
financial-system vulnerabilities. Are there any other considerations
that should form part of the CCyB decision-making framework?
Question 3. To what extent does the Board's proposed framework for
determining the appropriate level of the CCyB capture the appropriate
set of financial-system vulnerabilities? Are there any vulnerabilities
that should also be considered or are there vulnerabilities that should
be given greater or less consideration? How should vulnerabilities
developing outside of the banking sector be considered as compared to
vulnerabilities developing inside of the banking sector?
III. Administrative Law Matters
A. Use of Plain Language
Section 722 of the Gramm-Leach-Bliley Act (Pub. L. 106-102, 113
Stat. 1338, 1471, 12 U.S.C. 4809) requires the Federal banking agencies
to use plain language in all proposed and final rules published after
January 1, 2000. The Board has sought to present the proposed policy
statement in a simple and straightforward manner, and invites comment
on the use of plain language.
B. Paperwork Reduction Act Analysis
In accordance with the requirements of the Paperwork Reduction Act
of 1995 (44 U.S.C. 3506), the Board has reviewed the proposed policy
statement to assess any information collections. There are no
collections of information as defined by the Paperwork Reduction Act in
the proposal.
C. Regulatory Flexibility Act Analysis
The Board is providing an initial regulatory flexibility analysis
with respect to this proposed Policy Statement. As discussed above, the
proposed Policy Statement is designed to provide additional information
regarding the factors that the Board expects to consider in evaluating
whether to change the CCyB applicable to private-sector credit
exposures located in the United States. The Regulatory Flexibility Act,
5 U.S.C. 601 et seq. (RFA), generally requires that an agency prepare
and make available an initial regulatory flexibility analysis in
connection with a notice of proposed rulemaking. Under regulations
issued by the Small Business Administration, a small entity includes a
bank holding company with assets of $550 million or less (small bank
holding company).\15\ As of December 31, 2014, there were approximately
3,441 small BHCs, 187 small SLHCs, and 644 small state member banks.
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\15\ See 13 CFR 121.201. Effective July 14, 2014, the Small
Business Administration revised the size standards for banking
organizations to $550 million in assets from $500 million in assets.
79 FR 33647 (June 12, 2014).
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The proposed Policy Statement would relate only to advanced
approaches institutions, which, generally, are banking organizations
with total consolidated assets of $250 billion or more, that have total
consolidated on-balance sheet foreign exposure of $10 billion or more,
are a subsidiary of an advanced approaches depository institution, or
that elect to use the advanced approaches framework.\16\ Banking
organizations that would be covered by the proposed Policy
[[Page 5664]]
Statement substantially exceed the $550 million asset threshold at
which a banking entity would qualify as a small bank holding company,
small savings and loan holding company, or small state member bank.
Currently, no small top-tier bank holding company, small top-tier
savings and loan holding company, or small state member bank is an
advanced approaches institution, so there would be no additional
projected compliance requirements imposed on small bank holding
companies, small savings and loan holding companies, or small state
member banks.
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\16\ 12 CFR 217.100(b)(1).
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Therefore, there are no significant alternatives to the proposal
that would have less economic impact on small banking organizations.
There are no projected reporting, recordkeeping, or other compliance
requirements of the proposal. The Board does not believe that the
proposal duplicates, overlaps, or conflicts with any other Federal
rules. In light of the foregoing, the Board does not believe that the
proposal, if adopted in final form, would have a significant economic
impact on a substantial number of small entities. Nonetheless, the
Board seeks comment on whether the proposal would impose undue burdens
on, or have unintended consequences for, small organizations, and
whether there are ways such potential burdens or consequences could be
minimized in a manner consistent with the purpose of the proposal. A
final regulatory flexibility analysis will be conducted after
consideration of comments received during the public comment period.
List of Subjects in 12 CFR Part 217
Administrative practice and procedure, Banks, banking. Holding
companies, Reporting and recordkeeping requirements, Securities.
Authority and Issuance
For the reasons stated in the Supplementary Information, the Board
of Governors of the Federal Reserve System proposes to add the Policy
Statement as set forth at the end of the Supplementary Information as
appendix A to part 217 of 12 CFR chapter II as follows:
PART 217--CAPITAL ADEQUACY OF BANK HOLDING COMPANIES, SAVINGS AND
LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS
0
1. The authority citation for part 217 continues to read as follows:
Authority: 12 U.S.C. 248(a), 321-338a, 481-486, 1462a, 1467a,
1818, 1828, 1831n, 1831o, 1831p-l, 1831w, 1835, 1844(b), 1851, 3904,
3906-3909, 4808, 5365, 5368, 5371.
PART 217--CAPITAL ADEQUACY OF BANK HOLDING COMPANIES, SAVINGS AND
LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS
0
2. Appendix A to part 217 is added to read as follows:
Appendix A to Part 217--The Federal Reserve Board's Framework for
Implementing the Countercyclical Capital Buffer
1. Background
The Board of Governors of the Federal Reserve System (Board)
issued a final regulatory capital rule (Regulation Q) in
coordination with the Office of the Comptroller of the Currency
(OCC) and the Federal Deposit Insurance Corporation (FDIC) that
strengthened risk-based and leverage capital requirements applicable
to insured depository institutions and depository institution
holding companies (banking organizations).\1\ Among those changes
was the introduction of a countercyclical capital buffer (CCyB) for
large, internationally active banking organizations.\2\
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\1\ See 78 FR 62018 (October 11, 2013) (Board and OCC); 79 FR
20754 (April 14, 2014) (FDIC).
\2\ 12 CFR 217.11(b). The CCyB applies only to banking
organizations subject to the advanced approaches capital rules,
which generally apply to those banking organizations with greater
than $250 billion in assets or more than $10 billion in on-balance-
sheet foreign exposures. See 12 CFR 217.100(b). An advanced
approaches institution is subject to the CCyB regardless of whether
it has completed the parallel run process and received notification
from its primary Federal supervisor. See 12 CFR 217.121(d).
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The CCyB is a macroprudential policy tool that the Board can
increase during periods of rising vulnerabilities in the financial
system and reduce when vulnerabilities recede. It is designed to
increase the resilience of large banking organizations when
policymakers see an elevated risk of above-normal losses. Increasing
the resilience of large banking organizations should, in turn,
improve the resilience of the broader financial system. Above-normal
losses often follow periods of rapid asset price appreciation or
credit growth that are not well supported by underlying economic
fundamentals. The circumstances in which the Board would most likely
use the CCyB as a supplemental, macroprudential tool to augment
minimum capital requirements and other capital buffers would be to
address circumstances when potential systemic vulnerabilities are
somewhat above normal. By requiring large banking organizations to
hold additional capital during those periods of excess and removing
the requirement to hold additional capital when the vulnerabilities
have diminished, the CCyB also is expected to moderate fluctuations
in the supply of credit over time.\3\ Further, Regulation Q
established the initial CCyB amount with respect to U.S.-based
credit exposures at zero percent and provided that the maximum
potential amount of the CCyB for credit exposures in the United
States was 2.5 percent of risk-weighted assets.\4\
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\3\ Implementation of the CCyB also helps respond to the Dodd-
Frank Act's requirement that the Board seek to make its capital
requirements countercyclical 12 U.S.C. 1844(b), 1464a(g)(1), and
3907(a)(1) (codifying sections 616(a), (b), and (c) of the Dodd-
Frank Act).
\4\ The CCyB is subject to a phase-in arrangement between 2016
and 2019. See 12 CFR 217.300(a)(2).
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The Board expects to make decisions about the appropriate level
of the CCyB on U.S.-based credit exposures jointly with the OCC and
FDIC, and expects that the CCyB amount for U.S.-based credit
exposures will be the same for covered depository institution
holding companies and insured depository institutions. The CCyB is
designed to take into account the macrofinancial environment in
which banking organizations function and the degree to which that
environment impacts the resilience of the group of advanced
approaches institutions. Therefore, the appropriate setting of the
CCyB for private sector credit exposures located in the United
States (U.S.-based credit exposures) is not closely linked to the
characteristics of an individual institution. However, the overall
CCyB for each institution will differ because the CCyB is weighted
based on a banking organization's particular composition of private-
sector credit exposures across national jurisdictions.
2. Overview and Scope of the Policy Statement
This Policy Statement describes the framework that the Board
will follow in setting the amount of the CCyB for U.S.-based credit
exposures. The framework consists of a set of principles for
translating assessments of financial-system vulnerabilities that are
regularly undertaken by the Board into the appropriate level of the
CCyB. Those assessments are informed by a broad array of
quantitative indicators of financial and economic performance and a
set of empirical models. In addition, the framework includes an
assessment of whether the CCyB is the most appropriate policy
instrument (among available policy instruments) to address the
highlighted financial-system vulnerabilities.
3. The Objectives of the CCyB
The objectives of the CCyB are to strengthen banking
organizations' resilience against the build-up of systemic
vulnerabilities and reduce fluctuations in the supply of credit. The
CCyB supplements the minimum capital requirements and the capital
conservation buffer, which themselves are designed to provide
substantial resilience to unexpected losses created by normal
fluctuations in economic and financial conditions. The capital
surcharge on global systemically important banking organizations
adds an additional layer of defense for the largest and most
systemically important institutions, whose financial distress can
have outsized effects on the rest of the financial system and real
economy.\5\ However, periods of financial excesses, as reflected in
episodes of rapid
[[Page 5665]]
asset price appreciation or credit growth not well supported by
underlying economic fundamentals, are often followed by above-normal
losses that leave banking organizations and other financial
institutions undercapitalized. Therefore, the Board would most
likely apply the CCyB in those circumstances when systemic
vulnerabilities are somewhat above normal.
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\5\ See 80 FR 49082 (August 14, 2015).
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The CCyB is expected to help provide additional resilience for
advanced approaches institutions, and by extension the broader
financial system, against elevated vulnerabilities primarily in two
ways. First, advanced approaches institutions will likely hold more
capital to avoid limitations on capital distributions and
discretionary bonus payments resulting from implementation of the
CCyB. Strengthening their capital positions when financial
conditions are accommodative would increase the capacity of advanced
approaches institutions to absorb outsized losses during a future
significant economic downturn or period of financial instability,
thus making them more resilient. The second and related goal of the
CCyB is to promote a more sustainable supply of credit over the
economic cycle.
During a credit cycle downturn, better-capitalized institutions
have been shown to be more likely to have continued access to
funding and less likely to take actions that lead to broader
financial-sector distress and its associated macroeconomic costs,
such as large-scale sales of assets at prices below their
fundamental value and sharp contractions in credit supply.\6\
Therefore, it is likely that as a result of the CCyB having been put
into place during a period of rapid credit creation, advanced
approaches institutions would be better positioned to continue their
important intermediary functions during a subsequent economic
contraction. A timely and credible reduction in the CCyB requirement
during a period of high credit losses could reinforce those
beneficial effects of a higher base level of capital, because it
would permit advanced approaches institutions either to realize loan
losses promptly and remove them from their balance sheets or to
expand their balance sheets, for example by continuing to lend to
creditworthy borrowers.
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\6\ For additional background on the relationship between
financial distress and economic outcomes, see Carmen Reinhart and
Kenneth Rogoff (2009), This Time is Different. Princeton University
Press; [Ograve]scar Jord[agrave] & Moritz Schularick & Alan M.
Taylor (2011), ``Financial Crises, Credit Booms, and External
Imbalances: 140 Years of Lessons,'' IMF Economic Review, Palgrave
Macmillan, vol. 59(2), pages 340-378; and Bank for International
Settlements (2010), ``Assessing the Long-Run Economic Impact of
Higher Capital and Liquidity Requirements.''
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Likewise, during a period of cyclically increasing
vulnerabilities, advanced approaches institutions might react to an
increase in the CCyB by tightening lending standards, otherwise
reducing their risk exposure, augmenting their capital, or some
combination of those actions. They may choose to raise capital by
taking actions that would increase net income, reducing capital
distributions through share repurchases or dividends, or issuing new
equity. In this regard, an increase in the CCyB would not prevent
advanced approaches institutions from maintaining their important
role as credit intermediaries, but would reduce the likelihood that
banking organizations with insufficient capital would foster
unsustainable credit growth or engage in imprudent risk taking. The
specific combination of adjustments and the relative size of each
adjustment will depend in part on the initial capital positions of
advanced approaches institutions, the cost of debt and equity
financing, and the earnings opportunities presented by the economic
situation at the time.\7\
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\7\ For estimates of the size of certain adjustments, see Samuel
G. Hanson, Anil K. Kashyap, and Jeremy C. Stein (2011), ``A
Macroprudential Approach to Financial Regulation,'' Journal of
Economic Perspectives 25(1), pp. 3-28; Skander J. Van den Heuvel
(2008), ``The Welfare Cost of Bank Capital Requirements.'' Journal
of Monetary Economics 55, pp. 298-320.
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4. The Framework for Setting the U.S. CCyB
The Board regularly monitors and assesses threats to financial
stability by synthesizing information from a comprehensive set of
financial-sector and macroeconomic indicators, supervisory
information, surveys, and other interactions with market
participants.\8\ In forming its view about the appropriate size of
the U.S. CCyB, the Board will consider a number of financial-system
vulnerabilities, including but not limited to, asset valuation
pressures and risk appetite, leverage in the nonfinancial sector,
leverage in the financial sector, and maturity and liquidity
transformation in the financial sector. The decision will reflect
the implications of the assessment of overall financial-system
vulnerabilities as well as any concerns related to one or more
classes of vulnerabilities. The specific combination of
vulnerabilities is important because an adverse shock to one class
of vulnerabilities could be more likely than another to exacerbate
existing pressures in other parts of the economy or financial
system.
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\8\ Tobias Adrian, Daniel Covitz, and Nellie Liang (2014),
``Financial Stability Monitoring.'' Finance and Economics Discussion
Series 2013-021. Washington: Board of Governors of the Federal
Reserve System, http://www.federalreserve.gov/pubs/feds/2013/201321/201321pap.pdf.
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The Board intends to monitor a wide range of financial and
macroeconomic quantitative indicators including, but not limited to,
measures of relative credit and liquidity expansion or contraction,
a variety of asset prices, funding spreads, credit condition
surveys, indices based on credit default swap spreads, options
implied volatility, and measures of systemic risk.\9\ In addition,
empirical models that translate a manageable set of quantitative
indicators of financial and economic performance into potential
settings for the CCyB, when used as part of a comprehensive
judgmental assessment of all available information, can be a useful
input to the Board's deliberations. Such models may include those
that rely on small sets of indicators--such as the credit-to-GDP
ratio, its growth rate, and combinations of the credit-to-GDP ratio
with trends in the prices of residential and commercial real
estate--which some academic research has shown to be useful in
identifying periods of financial excess followed by a period of
crisis on a cross-country basis.\10\ Such models may also include
those that consider larger sets of indicators, which have the
advantage of representing conditions in all key sectors of the
economy, especially those specific to risk-taking, performance, and
the financial condition of large banks.\11\
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\9\ See 12 CFR 217.11(b)(2)(iv).
\10\ See, e.g., Jorda, Oscar, Moritz Schularick and Alan Taylor,
2012. ``When Credit Bites Back: Leverage, Business Cycles and
Crises,'' Working Papers 1224, University of California, Davis,
Department of Economics, and Drehmann, Mathias, Claudio Borio, and
Kostas Tsatsaronis, 2012. ``Characterizing the financial cycle:
don't lose sight of the medium term!'' BIS Working Papers 380, Bank
for International Settlements. Jorda, Oscar, Moritz Schularick and
Alan Taylor, 2015. ``Leveraged Bubbles,'' Center for Economic Policy
Research Discussion Paper No. DP10781. BCBS (2010), ``Guidance for
national authorities operating the countercyclical capital buffer,''
BIS.
\11\ See, e.g., Aikman, David, Michael T. Kiley, Seung Jung Lee,
Michael G. Palumbo, and Missaka N. Warusawitharana (2015), ``Mapping
Heat in the U.S. Financial System,'' Finance and Economics
Discussion Series 2015-059. Washington: Board of Governors of the
Federal Reserve System, http://dx.doi.org/10.17016/FEDS.2015.059
(providing an example of the range of indicators used and type of
analysis possible).
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However, no single indictor or fixed set of indicators can
adequately capture all the key vulnerabilities in the U.S. economy
and financial system. Moreover, adjustments in the CCyB that were
tightly linked to a specific model or set of models would be
imprecise due to the relatively short period that some indicators
are available, the limited number of past crises against which the
models can be calibrated, and limited experience with the CCyB as a
macroprudential tool. As a result, the types of indicators and
models considered in assessments of the appropriate level of the
CCyB are likely to change over time based on advances in research
and the experience of the Board with this new macroprudential tool.
The Board will determine the appropriate level of the CCyB for
U.S.-based credit exposures based on its analysis of the above
factors. Generally, a zero percent U.S. CCyB amount would reflect an
assessment that U.S. economic and financial conditions are broadly
consistent with a financial system in which levels of system-wide
vulnerabilities are not somewhat above normal. The Board could
increase the CCyB as vulnerabilities build, and a 2.5 percent CCyB
amount for U.S.-based credit exposures would reflect an assessment
that the U.S. financial sector is experiencing a period of
significantly elevated or rapidly increasing system-wide
vulnerabilities. Importantly, as a macroprudential policy tool, the
CCyB will be activated and deactivated based on broad developments
and trends in the U.S. financial system, rather than the activities
of any individual banking organization.
Similarly, the Board would remove or reduce the CCyB when the
conditions that led to its activation abate or lessen, rather than
leaving the nonzero level of the buffer in place over periods when
financial and
[[Page 5666]]
economic developments suggest the absence of notable risks to
financial stability. Indeed, for it to be most effective, the CCyB
should be deactivated or reduced in a timely manner. This would
reduce the likelihood that advanced approaches institutions would
significantly pare their risk-weighted assets in order to maintain
their capital ratios during a downturn.
The pace and magnitude of changes in the CCyB will depend
importantly on the underlying conditions in the financial sector and
the economy as well as the desired effects of the proposed change in
the CCyB. If vulnerabilities are rising gradually, then incremental
increases in the level of the CCyB may be appropriate. Incremental
increases would allow banks to augment their capital primarily
through retained earnings and allow policymakers additional time to
assess the effects of the policy change before making subsequent
adjustments. However, if vulnerabilities in the financial system are
building rapidly, then larger or more frequent adjustments may be
necessary to increase loss-absorbing capacity sooner and potentially
to mitigate the rise in vulnerabilities.
The Board will also consider whether the CCyB is the most
appropriate of its available policy instruments to address the
financial-system vulnerabilities highlighted by the framework's
judgmental assessments and empirical models. The CCyB primarily is
intended to address cyclical vulnerabilities, rather than structural
vulnerabilities that do not vary significantly over time. Structural
vulnerabilities are better addressed though targeted reforms or
permanent increases in financial system resilience. Two key factors
for the Board to consider are whether advanced approaches
institutions are exposed--either directly or indirectly--to the
vulnerabilities identified in the comprehensive judgmental
assessment or by the quantitative indicators that suggest activation
of the CCyB and whether advanced approaches institutions are
contributing--either directly or indirectly--to these highlighted
vulnerabilities.
The Board, in setting the CCyB for advanced approaches
institutions that it supervises, plans to consult with the OCC and
FDIC on their analyses of financial-system vulnerabilities and on
the extent to which banking organizations are either exposed to or
contributing to these vulnerabilities.
5. Communication of the U.S. CCyB With the Public
The Board expects to consider at least once per year the
applicable level of the U.S. CCyB. The Board will review financial
conditions regularly throughout the year and may adjust the CCyB
more frequently as a result of those monitoring activities.
Further, the Board will continue to communicate with the public
in other formats regarding its assessment of U.S. financial
stability, including financial-system vulnerabilities. For example,
the Board's biannual Monetary Policy Report to Congress, usually
published in February and July, will continue to contain a section
that reports on developments pertaining to the stability of the U.S.
financial system.\12\ That portion of the report will be an
important vehicle for updating the public on how the Board's current
assessment of financial-system vulnerabilities bears on the setting
of the CCyB.
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\12\ For the most recent discussion in this format, see box
titled ``Developments Related to Financial Stability'' in Board of
Governors of the Federal Reserve System, Monetary Policy Report to
Congress, July 2015, pp. 24-25.
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6. Monitoring of the Effects of the U.S. CCyB
The effects of the U.S. CCyB ultimately will depend on the level
at which it is set, the size and nature of any adjustments in the
level, and the timeliness with which it is increased or decreased.
The extent to which the CCyB may affect vulnerabilities in the
broader financial system depends upon a complex set of interactions
between required capital levels at the largest banking organizations
and the economy and financial markets. In addition to the direct
effects, the secondary economic effects could be amplified if
financial markets extract a signal from the announcement of a change
in the CCyB about subsequent actions that might be taken by the
Board. Moreover, financial market participants might react by
updating their expectations about future asset prices in specific
markets or broader economic activity based on the concerns expressed
by the regulators in communications announcing a policy change.
The Board will monitor and analyze adjustments by banking
organizations and other financial institutions to the CCyB. Factors
that will be considered include (but are not limited to) the types
of adjustments that affected banking organizations might undertake.
For example, it will be useful to monitor whether a change in the
CCyB leads to observed changes in risk-based capital ratios at
advanced approaches institutions, as well as whether those
adjustments are achieved passively through retained earnings, or
actively through changes in capital distributions or in risk-
weighted assets. Other factors to be monitored include the extent to
which loan growth and spreads on loans issued by affected banking
organizations change relative to loan growth and loan spreads at
banking organizations that are not subject to the buffer. Another
key consideration in setting the CCyB and other macroprudential
tools is the extent to which the adjustments by advanced approaches
institutions to higher capital buffers lead to migration of credit
market activity outside of those banking organizations, especially
to the nonbank financial sector. Depending on the amount of
migration and which institutions are affected, those adjustments
could cause the Board to favor either a higher or a lower value of
the CCyB.
The Board will also monitor information regarding the levels of
and changes in the CCyB in other countries. The Basel Committee on
Banking Supervision is expected to maintain this information for
member countries in a publically available form on its Web site.\13\
Using that data in conjunction with supervisory and publicly
available datasets, Board staff will be able to draw not only upon
the experience of the United States but also that of other countries
to refine estimates of the effects of changes in the CCyB.
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\13\ BIS, Countercyclical capital buffer (CCyB), www.bis.org/bcbs/ccyb/index.htm.
By order of the Board of Governors of the Federal Reserve
System, December 21, 2015.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2016-01934 Filed 2-2-16; 8:45 am]
BILLING CODE P