Excess capital (i.e., the maximum amount of capital a bank can return to its shareholders without violating any capital requirement) declined by $91 billion, driven by the extreme severity of the Fed’s stress scenario in this year’s exercise. In previous research, we demonstrated that excess bank capital is an important determinant of economic growth;
The resulting increase in capital requirements is likely to increase the cost of bank loans, especially to cyclically sensitive sectors, including loans to corporations that are not considered “investment grade”, small businesses, and households with less-than-pristine credit histories;
This year’s results illustrate that capital requirements in the United States are highly volatile from year to year and that the volatility will be magnified by the integration of the regulatory capital rules with the CCAR and stress testing rules under the stress buffer requirements proposal; and
Lastly, the potential removal of the qualitative assessment of CCAR (as speculated by a recent Wall Street Journal article) would not reduce banks’ incentives to invest in passing the stress tests. If anything, the importance of stress testing is likely to increase as a result of the proposed stress buffer requirements and the proposed rating system for large financial institutions.
The Clearing House
June 29, 2018
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