SIFMA and ISDA Urge Fed to Revise Stress Capital Buffer Rule Proposal
Commentary by Sebastian Souchet
SIFMA and ISDA urged the Federal Reserve Board ("Fed") to make major changes to proposed revisions to the Stress Capital Buffer ("SCB") rule, which governs how much capital large banks must hold to withstand economic downturns.
The Fed proposal included (i) averaging stress test results over two years to reduce volatility in capital requirements for large banks, (ii) moving the SCB effective date from October 1 to January 1, (iii) adjusting the dividend add-on calculation and (iv) revising data collection forms. (See previous coverage.)
In their joint letter, SIFMA and ISDA urged the Fed to adopt "asymmetric averaging," which would allow banks to lower their capital requirements faster when risks decreased, but take more time to adjust to rising risks. The associations also asked the Fed to remove the dividend add-on component, calling it inconsistent with existing payout restrictions already in place for stressed situations.
SIFMA and ISDA criticized the Fed's stress test scenarios as unrealistic. The groups said they ignored the many financial reforms put in place after the 2008 crisis, including the Volcker Rule, margin requirements and mandatory derivatives clearing. The associations added that current stress test models assumed banks took unhedged trading risks that they were no longer allowed to take.
SIFMA and ISDA also warned of excessive overlap between the SCB and other capital rules, such as risk-weighted asset ("RWA") requirements under the Basel III Endgame proposal. They said the result was overcapitalization that could limit banks' ability to support financial markets and the broader economy.
The associations supported the new effective date and streamlined data forms but warned that the proposal failed to address other problems in the SCB framework. They requested that banks be allowed to use the current SCB rule through September 30, 2026, even if the final rule takes effect earlier. They also asked the Fed to clarify that the 2025 SCB would remain in place through December 31, 2026, to avoid transition-related uncertainty.
Commentary
In their comment letter, SIFMA/ISDA advocate for "asymmetric averaging," which would "allow[] for more timely recognition of reduced risks and give[] large banking organizations time to managed increased risks." However, neither the FRB proposal's approach to averaging, nor the SIFMA/ISDA letter's asymmetric averaging approach, appears to distinguish between year-over-year volatility driven by changes in stress test scenario design and volatility driven by material changes in banks' balance sheets. This distinction is a key factor that the FRB should consider as it looks to recalibrate the stress testing framework.
As federal banking regulators review the Basel III Endgame proposal, they should seriously consider SIFMA/ISDA's arguments regarding the "material overlap in risk capture by the current supervisory stress testing framework and the RWA framework." Importantly, the associations highlight the regulatory redundancy of having both (i) the supervisory stress testing framework's global market shock and largest counterparty default components and (ii) the RWA calculations for market risk and credit risk under the standardized approach, and for credit valuation adjustment risk and operational risk under the advanced approaches.
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The Federal Reserve Board proposed "[to] amend the calculation of the Board's stress capital buffer requirement."