Table of Contents
1. Introduction
Below, we summarize the guidance and analyze the recent revisions to the tailoring framework. We focus on CCAR Supervisory ExpectationsComprehensive Capital Analysis and Review supervisory expectations that vary by bank category based on size, complexity, and systemic importance. for Category I (US GSIBs) vs. Category II or III (≥ $250B total assets) banks but also mention Category IV banks and Horizontal Capital ReviewsHCRs are more limited in scope, include targeted horizontal evaluations of specific areas of capital planning, and focus on tailored standards for Category IV firms. (HCRs).
1.A. Federal Reserve Tailoring Framework Overview
A few years ago, the Federal Reserve revised guidance documents on supervisory assessment of capital planning and positions (SR 15-18 and SR 15-19) based on their tailoring framework finalized in 2019. The framework is intended to match the Board’s enhanced prudential standardsEPS – regulatory standards that apply enhanced requirements to large banking organizations based on their size, complexity, and systemic risk. (EPS) for large U.S. banking organizations with their risk profiles.
The changes significantly reduce regulatory compliance requirements on smaller firms while maintaining existing requirements for larger firms and are consistent with the Economic Growth, Regulatory Relief, and Consumer Protection ActEGRRCPA – signed into law in May 2018, this act provided regulatory relief for smaller banks and modified some Dodd-Frank requirements. (EGRRCPA) signed into law in May 2018.
| Category | Guidance | Application |
|---|---|---|
| I | SR15-18 | U.S. GSIBs |
| II | SR15-19 | ≥$750B total assets ≥$75B cross jurisdictional activity |
| III | SR15-19 | ≥$250B total assets ≥$75B nonbank assets, wSTWF, or off-BS exposure |
| IV | None, But* Subject to HCRs** | $100B to $250B total assets |
A few things to note:
*While Category IV firms aren’t technically subject to SR 15-19, it seems that some “aspire” to those standards. Where the inspiration for the aspiration usually originates, well, we leave it to the reader’s imagination, especially for BHCs that were previously subject to it. Throughout the document, we’ll use “BUT…,” as a reminder of this situation.
**HCRs are Horizontal Capital Reviews, which per the Fed, are “…more limited in scope, includes targeted horizontal evaluations of specific areas of capital planning, and focuses on the more tailored standards set forth in supervisory guidance specific to these firms.”
1.B. How was guidance applied before the revision?
SR 15-18 was previously applied to U.S. bank holding companies and intermediate holding companies that are either:
- Subject to the Federal Reserve’s Large Institution Supervision Coordinating CommitteeLISCC framework – the Fed’s supervisory framework for the largest, most systemically important banking organizations. (LISCC) framework
- Have total consolidated assets of $250B or more, or
- Have consolidated total on-balance sheet foreign exposure of $10B or more
However, now, the guidance has been updated to apply just to Category I firms or global systematically important banksUS GSIBs – the largest U.S. banks that are deemed systemically important and subject to the most stringent regulatory requirements. (US GSIBs).
SR 15-19 was previously applied to U.S. bank holding companies that:
- Have total consolidated assets of at least $50B but less than $250B
- Have consolidated total on-balance sheet foreign exposure of less than $10B
- Are not otherwise subject to the Federal Reserve’s LISCC framework
SR 15-19 has been updated to only include Category II or III firms, which includes firms with total assets between $250B and $700B, BUT…
It is important to also note that banks subject to SR 15-18 are still held to higher expectations than banks subject to SR 15-19. What changes with the revisions is that most banks formerly subject to SR 15-18 are now subject to SR 15-19 and former SR 15-19 banks are no longer subject to either document.
The content in the SR 15-18 and SR 15-19 remains largely the same as it was originally in 2015, and the differences we wrote about then are still valid today. Firms that were subject to SR 15-19 are no longer subject to either document. BUT…
1.C. What are the differences between SR 15-18 and SR 15-19?
Overall, we see the differences between SR 15-18 and SR 15-19 falling into one of four types:
| Type | Description |
|---|---|
| Type 1: Codification | Formalization of existing differences in treatment; CCAR expectations for Category I banks were already greater than for many Category II or III banks. |
| Type 2: Relaxation | Genuine loosening of standards for Category II or III banks. |
| Type 3: Shifted Scrutiny | Items not required “in its capital planning process” are subject to other, non-CCAR regulatory reviews, e.g., SR 12-7Federal Reserve guidance on stress testing that applies to every bank with more than $10B in assets.. |
| Type 4: Guidance Gap | SR 15-19 eliminates certain explicit requirements but leaves a void. It provides no official “Guidance” of its own. The surest way to reduce regulatory uncertainty may be to follow SR 15-18 guidance. |
2. Background on CCAR Requirements
In 2015, Republicans, led by Richard Shelby (AL), the chairman of the Senate Banking Committee, attempted to raise the CCAR threshold to $500B from $50B, while it seemed that the Federal Reserve was willing to accept a modest increase. Many observers believed that an increase would be part of the overall budget compromise, but it was not.
Shortly after the budget compromise in December 2015, Treasury Secretary Jack Lew stated that Dodd-FrankThe Dodd-Frank Wall Street Reform and Consumer Protection Act – comprehensive financial reform legislation passed in 2010 following the financial crisis. provided regulators with the flexibility to tailor oversight to an institution’s size. The Secretary stated that $500B institutions are enormous–some of the largest financial institutions in the world. He then added that $150B – $250B institutions are almost as enormous, with the implication being both sets of institutions required oversight.
The day after the budget vote, the Federal Reserve released SR 15-18 and SR 15-19, which divided CCAR requirements between (1) large and complex firms with total consolidated assets greater than $250B, and (2) large and non-complex firms with total consolidated assets between $50B and $250B. It is tempting to view SR 15-19 as a regulatory workaround or substitute to increasing the CCAR threshold, especially since its publication was the DAY AFTER political efforts to raise the threshold failed.
In both SR 15-18 and SR 15-19, at the end of each section and appendix, the Fed attempts to summarize the differences. We outline the differences (where there are any) in the same way, by section and appendix.
3. Differences in Sections
In both SR 15-18 and SR 15-19, at the end of each section and appendix, the Fed attempts to summarize the differences. We outline the differences (where there are any) in the same way, by section and appendix.
3.A. Governance
There is no difference in the expectations of boards of directors, and there are only minor differences in the expectations of senior managers. For example, senior managers at Category I banks must review the capital planning process at least quarterly, whereas executives at Category II or III banks can do it semi-annually. Also, executives at Category I banks must show a higher level of engagement. We know of no objective way to measure “engagement,” and consider this to be a Type 1Codification or formalization of existing differences in treatment; CCAR expectations for Category I banks were already greater than for many Category II or III banks. difference–formalizing existing differences.
3.B. Risk Management
Risk Management has two subsections with a bit of overlap between them: (1) Risk Identification and Assessment Process and (2) Risk Measurement and Risk Materiality.
3.B.1. Risk Identification and Assessment Process
The biggest difference is that Category I banks must have a formal risk identification process and evaluate material risks quarterly, while that bullet/expectation is missing in SR 15-19. That seems to be a lower expectation for Category II or III banks, which may have quarterly risk identification processes and committee meetings. That’s a Type 2Actual relaxation or loosening of standards for Category II or III banks. difference; however, we think the overall differences fit into Type 4Guidance (with a capital “G”) versus small “g” guidance: SR 15-19 eliminates certain explicit requirements but leaves a void and provides no official “Guidance” of its own., which involves less written Guidance for the smaller banks, and, therefore, more uncertainty. Besides the missing bullet, four other sentences are missing from SR 15-19. These involve identifying risks that are difficult to quantify, segmenting risks, seeking comments from stakeholders across the organization, and quarterly updates to risk assessments. However, the main requirements are the same:
We’re not sure how a firm can show that material risks are represented without considering all risks, including those that are difficult to quantify, and without seeking advice from stakeholders across the organization. The problem with showing that you’ve captured your material risks is that you must show that your other risks are immaterial–whether they are difficult to quantify, or not. So, while one could argue that Category II or III have fewer requirements, we would argue that the best way to satisfy those requirements is to still follow the guidance in SR 15-18. In summary, other than possibly reducing the frequency of processes and meetings, there’s no real change.
3.B.2. Risk Measurement and Risk Materiality
The main requirement–the first sentence below–is the same:
The second sentence holds for Category I firms, while the Category II or III firms “…should employ risk measurement approaches that are appropriate for its size, complexity, and risk profile.” Technically, it’s impossible to measure anything without using a quantitative approach. Moreover, as with the word, “engagement,” in the Governance section, the word, “appropriate,” here, is problematic. The question is: who gets to decide what’s appropriate? Hint: it’s not firm.
The last paragraph of this subsection in 15-19 is missing in 15-18. It describes expectations for identifying and measuring risks that are inherent in the firm’s business practices as well as closely assessing assumptions about risk reduction from transfer or mitigation techniques. There’s a sentence about trading arrangements and another about asset values. (1) If your non-complex firm is reducing stress losses by applying contingent risk reduction methods, you are still going to have to defend those hypothetical actions. (2) In addition, we view this as a Type 3Scrutiny shifted to other, non-CCAR regulatory reviews for items that are not required “in its capital planning process,” e.g., SR 12-7. difference: anticipate defending your risk reduction techniques in other supervisory exams.
3.C. Internal Controls
At the end of this section’s introduction, SR 15-18 includes the following statement, which is absent from SR 15-19: “…the control framework should include an evaluation of the firm’s process for integrating the separate components of the capital planning process at the enterprise-wide level.”
When summarizing the “differences” at the end of the section, the Fed emphasizes the integration aspect. However, when read in the context of the preceding two identical paragraphs and three identical bullet points, we see no difference in requirements or expectations. The first sentence of the section and the main requirement for all CCAR banks is: “A firm should have a sound internal control framework that helps ensure that all aspects of the capital planning process are functioning as designed and result in sound assessments of the firm’s capital needs.” We’re not sure how to ensure that all aspects of the process are functioning correctly without considering their integration.
There are four subsections. We’ll review the first two, where differences exist:
- Comprehensive Policies, Procedures, and Documentation for Capital Planning
- Model Validation and Independent Review of Estimation Approaches
- Management Information Systems and Change Control Processes
- Internal Audit Function
3.C.1. Comprehensive Policies, Procedures, and Documentation for Capital Planning
The differences in C.1. aren’t really differences. SR 15-19 is missing a sentence and paragraph related to (i) evidence of adherence and (ii) documentation, respectively. However, in our and many others’ experiences, examiners seem to have the view that if it’s not documented, it wasn’t done. So, any executive at a Category II or III bank who views the absence of those expectations as a sign that evidentiary and documentation requirements are light-to-nonexistent and acts accordingly is taking a large institutional risk and, we would imagine, a large personal risk.
3.C.2. Model Validation and Independent Review of Estimation Approaches
In the first two paragraphs of C.2., SR 15-19 emphasizes the application to material models, whereas SR 15-18 is comprehensive and covers all CCAR models. That is a difference. However, remember that for banking supervisors, any categorization of immaterial requires evidence. You can’t just say something is immaterial. You have to prove it. In addition, it’s crucial that the same criteria (to determine materiality) are applied consistently across the objects of interest.
Executives at Category II or III banks should know the examiners will be watching for firms to redefine portfolios to fall beneath the firm’s materiality threshold(s). In that regard, consider the following well-used metaphor and proverb, respectively: (i) the straw that broke the camel’s back, and (ii) the Duck Test: if it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck. In those regards, we expect that the regulators will determine materiality based on the closeness of both loss behavior and the macroeconomic correlations across portfolios. A “small” portfolio that behaves like other portfolios could be that metaphorical straw that breaks the bank, and, therefore, we would expect higher scrutiny of it. In addition, if the same macro variables are used to forecast losses in a small portfolio as in other portfolios, then that makes it harder to pass the Duck Test, so-to-speak. We view materiality as relative to the firm’s systemic risk, not in isolation or with respect to absolute size.
Both attachments include similar phrases: “… a firm should conduct a conceptual soundness review of all models prior to their use in capital planning,” with “material” replacing “all” in SR 15-19. SR 11-7 (OCC 2012-11) lists the core elements of an effective model validation framework as:
- Evaluation of conceptual soundness, including developmental evidence
- Ongoing monitoring, including process verification and benchmarking
- Outcomes analysis, including back-testing
Note that these three elements are neither mutually exclusive nor equal in the effort required to complete them. In our experience, checking a model’s conceptual soundness takes up at least 75% of the total time and effort of a full validation. Much of this work includes (a) analyzing outcomes—like back-testing different design choices—and (b) verifying processes and comparing alternative models. Part (a) helps answer “is it the right math?” and part (b) helps answer “is the math right?” Together, these questions are key to judging whether a model is conceptually sound.
Please note that we are not criticizing the Fed’s validation approach. We’re just pointing out that focusing only on conceptual soundness doesn’t save two-thirds of the time or cost of a full validation. It also doesn’t mean a full validation can be skipped or that the exceptions process for unvalidated models can be ignored. So, while the Fed may be more patient with CCAR banks, there’s no sign it’s relaxing expectations for model risk management. That’s why we see this as a Type 3Scrutiny shifted to other, non-CCAR regulatory reviews for items that are not required “in its capital planning process,” e.g., SR 12-7. difference for all firms. SR 15-19 refers to SR 11-7 several times, and each time the standards are either repeated or directly cited. There’s no sign of easing.
As for benchmark models, SR 15-19 doesn’t mention them, which might seem like a Type 2Actual relaxation or loosening of standards for Category II or III banks. difference. But we see it as a Type 4Guidance (with a capital “G”) versus small “g” guidance: SR 15-19 eliminates certain explicit requirements but leaves a void and provides no official “Guidance” of its own. difference—especially for Category II and III firms that already use multiple models. Benchmark models help show that the main model is conceptually sound and support overlays or adjustments. SR 11-7 still expects them for important models. So, if a firm already has a benchmark model and it’s still valid, it makes sense to keep using it.
3.D. Capital Policy
SR 15-18 includes three bullet points that describe the elements to include in the capital policy. That is a difference, but it is a Type 4Guidance (with a capital “G”) versus small “g” guidance: SR 15-19 eliminates certain explicit requirements but leaves a void and provides no official “Guidance” of its own. difference. When a 15-19 firm writes or rewrites its capital policy, we suggest it uses those three bullet points as additional guidance about what to include.
3.E. Incorporating Stress Conditions and Events
There are several differences in this section, but we classify them as either Type 3Scrutiny shifted to other, non-CCAR regulatory reviews for items that are not required “in its capital planning process,” e.g., SR 12-7. or Type 4Guidance (with a capital “G”) versus small “g” guidance: SR 15-19 eliminates certain explicit requirements but leaves a void and provides no official “Guidance” of its own.. For example, SR 15-18 includes a sentence at the end of the first paragraph that does not appear in SR 15-19:
In the box at the end of the section, that difference is stated:
The subsections on Scenario Design (E.1) and Scenario Narrative are both much shorter in SR 15-19 than in SR 15-18. However, these are Type 4Guidance (with a capital “G”) versus small “g” guidance: SR 15-19 eliminates certain explicit requirements but leaves a void and provides no official “Guidance” of its own. differences: there is less formal guidance for 15-19 firms, so following the additional SR 15-18 guidance is probably the easiest way to avoid unwanted findings. For example, in the Differences box, the Fed writes that it “expects these (Category I) firms to articulate how risks not captured by scenario analysis are otherwise addressed in the capital planning process.” That expectation is not in SR 15-19. However, given the purpose and nature of the CCAR exercise, would any responsible executive at a 15-19 firm exclude such elaboration and analysis? We think not. Moreover, this relaxation seems to be contradicted by the entire first paragraph in Section F.
3.F. Estimating Impact on Capital Positions
In SR 15-18, this section is about one page longer than in SR 15-19; however, except for some of the expectations related to operational risk, we don’t see real differences or changes. They are Type 1Codification or formalization of existing differences in treatment; CCAR expectations for Category I banks were already greater than for many Category II or III banks. (codification of existing differences), and Type 4Guidance (with a capital “G”) versus small “g” guidance: SR 15-19 eliminates certain explicit requirements but leaves a void and provides no official “Guidance” of its own. as 15-19 firms will likely follow 15-18 guidance to reduce regulatory risk.
For example, consider the first paragraph in F.1., Loss Estimation, in SR 15-19:
Now, how could or should a firm provide support for the assumed relationships between risk drivers and losses? Look at the first paragraph in SR 15-18:
Consider the first sentence in 15-19.
- How can a 15-19 bank provide support without using a sound method? Would sufficient support consist of using an unsound method?
- Would the sound method empirically demonstrate that a relationship exists between economic variables and losses, or is actual evidence no longer needed?
- Many of the SR 15-19 banks are regional. Would it make sense to for those firms to use only national variables that the Fed provides for their own bank’s regional portfolios or exposures, especially if they view CCAR as more than a regulatory exercise? We think not.
- Consider the second sentence in 15-19, is there a difference between estimating losses by type of business activity and losses based on the firm’s exposures and activities, including retail and wholesale credit, securities, market risk, operational risk losses, etc?
Reading the paragraphs immediately after the italicized ones in Sections F.1.a. shows only one minor difference related to credit losses on loans and securities; 15-18 firms should account for loss timing each quarter. Otherwise, the requirements are the same:
The first sentence says it all, which is why we interpret the italicized paragraphs of F.1., above, to have the same meaning.
SR 15-18 does include a paragraph on fair-value losses on loans and securities as well as a paragraph on market risk and trading, including counterparty exposures. If these are material for 15-19 firms, we would recommend they follow the 15-18 guidance.
Regarding operational-risk losses, both constituencies are to have sound processes, but only 15-18 firms need “a structured, transparent and repeatable framework to develop credible loss projections…” Really? And only 15-18 firms need approaches that are “well supported.” It would be great to hear an explanation of how 15-19 firms can have sound processes that are unstructured, opaque, non-repeatable, and poorly supported. Anyone?
4. Differences in Appendices
As in the main sections, the word “material” appears in the SR 15-19 appendices, but tends to be absent in SR 15-18. Our caution remains the same: if a 15-19 bank wants to treat an item as immaterial, be prepared to document it, provide evidence of its immateriality, and ensure consistency in the threshold across the objects of interest, e.g., loan portfolios.
4.A. Use of Models and Other Estimation Methods
4.A.1. Quantitative Approaches
In SR 15-19, this section is a single, medium-sized paragraph. In SR 15-18, it’s about five times as long. What’s the difference? The single paragraph in 15-19 seems to be a summary of the four paragraphs in 15-18. In other words, how would we comprehend the meaning of the 15-19 paragraph? We would read the details in 15-18. For example, 15-19 states:
First, and most importantly, how does one know if losses are sensitive to different drivers unless one does the analysis? Second, how should the losses be estimated? SR 15-18 states:
The same holds true for subsections 1.a., on the Use of Data, and 1.b., on the Use of Vendor Models. However, there is a Type 3Scrutiny shifted to other, non-CCAR regulatory reviews for items that are not required “in its capital planning process,” e.g., SR 12-7. difference with vendor models. The missing paragraph on vendor management in 15-19 will be covered during vendor management compliance exams, rather than as part of the CCAR review.
4.A.2 Assessing Model Performance & A.3. Qualitative Approaches
15-19 ignores any mention of benchmark models, and it also excludes the following paragraph from 15-18:
As we stated above, if an executive at a Category II or III bank interprets the absence of this paragraph as a sign that CCAR model validations need not be thorough, we strongly recommend that he or she reread SR 11-07 or OCC 2011-12 as many times as necessary. Likewise, if one believes that qualitative approaches are easier to defend than models, please read the first paragraph on page 12 of SR 11-07. Moreover, if the qualitative approach generates a numerical output, then we would anticipate that it would need to be on the firm’s CCAR model inventory and, therefore, would need to be validated. Qualitative approaches may initially seem cheap, but they can get very expensive, especially relative to available and defendable quantitative approaches.
4.B. Model Overlays
SR 15-19 excludes one and two-thirds paragraphs that appear in SR 15-18 related to (1) avoiding the extensive reliance on overlays and (2) identifying factors necessitating the use of an overlay (and how the overlay compensates for those factors or weaknesses), respectively. First, extensive reliance on overlays can indicate that a model is not conceptually sound. So, while that may be permissible for 15-19 firms, that doesn’t mean it should be done. In addition, 15-19 does require support; it uses words like, “well-supported” and “appropriate.” We’re not sure how to show the appropriateness of an overlay without identifying the factors necessitating it or how the overlay compensates for those shortcomings. Therefore, we view these as Type 4Guidance (with a capital “G”) versus small “g” guidance: SR 15-19 eliminates certain explicit requirements but leaves a void and provides no official “Guidance” of its own. differences: how should a 15-19 show support and appropriateness? Understand and follow the more detailed 15-18 guidance.
The sections in Appendix B, (1) Process of Applying Overlays and (2) Governance of Overlays, follow the same pattern. SR 15-19 is shorter and less prescriptive, which makes it harder to interpret and increases uncertainty, if not anxiety. So, our recommendation remains the same: to understand what the terser 15-19 is requiring, read 15-18.
4.C. Use of Benchmark Models in the Capital Planning Process
SR 15-18’s appendix is one page long. SR 15-19’s contains two sentences:
Given that benchmarking is mentioned 11 times in SR 11-7, the need for it as part of model validation has been interpreted somewhat differently than the need for them in SR 15-19. For example, we’ve heard regulators frequently mention that methods to assess performance would include building or reviewing benchmark models. Therefore, we, again, caution 15-19 executives to ignore SR 11-7 at their own peril.
4.D. Sensitivity Analysis and Assumptions Management
4.D.1. Sensitivity Analysis
There is no real difference. SR 15-19 includes “material” three times, and SR 15-18 includes a few examples. This sentence says it all for both types of CCAR firms:
4.D.2. Assumptions Management
The following warning is not in SR 15-19. This is a Type 4Guidance (with a capital “G”) versus small “g” guidance: SR 15-19 eliminates certain explicit requirements but leaves a void and provides no official “Guidance” of its own. difference as we can’t imagine that examiners would allow 15-19 banks to behave otherwise.
It might seem like a large, Type 2Actual relaxation or loosening of standards for Category II or III banks. difference, but we would be extremely wary of that interpretation.
4.E. Role of Internal Audit Function in the Capital Planning Process
4.E.1. Responsibilities of Audit Function
There is one relatively large difference: audit departments of 15-18 firms are expected to have internal, quantitative expertise. Many Category II or III firms have already established internal quantitative expertise while subject to SR 15-18 expectations.
Six bullets of supervisory expectations that are in 15-18 are missing from 15-19. Again, we would consider these Type 4Guidance (with a capital “G”) versus small “g” guidance: SR 15-19 eliminates certain explicit requirements but leaves a void and provides no official “Guidance” of its own. differences and would urge 15-19 banks to consider the bullets as small “g” guidance to follow.
In this appendix’s other sections, related to E.2. Development of the Audit Plan and E.3. Briefings to Senior Management and the Board, we see analogous Type 3Scrutiny shifted to other, non-CCAR regulatory reviews for items that are not required “in its capital planning process,” e.g., SR 12-7. and Type 4Guidance (with a capital “G”) versus small “g” guidance: SR 15-19 eliminates certain explicit requirements but leaves a void and provides no official “Guidance” of its own. differences. For example, the audit departments of 15-18 banks must report any material deficiencies, limitations, or weaknesses related to the firm’s capital planning process to the board. That expectation is missing for 15-19 firms; however, such issues would be part of a general internal audit board report.
4.F. Capital Policy
There is no difference in the introduction or in Section 1, Post-Stress Capital Goals. In Section 2, Dividends and Stock Repurchases, 15-18 has an additional paragraph that we classify as Type 4Guidance (with a capital “G”) versus small “g” guidance: SR 15-19 eliminates certain explicit requirements but leaves a void and provides no official “Guidance” of its own..
In Section 3, Contingency Plans for Capital Shortfalls, 15-19 firms need not link triggers in the capital plan to triggers in the firm’s recovery plan. That is a difference. Also, 15-18 has an additional paragraph related to detailed explanations of circumstances in which the firm would implement contingency plans as well as the ranking of possible actions across several dimensions. That is a real difference; however, if such a situation were to arise, we would imagine that regulators would require the same type of analysis before approving any capital action for any bank. Therefore, while less administratively less burdensome for 15-19 firms, planning in accordance to the paragraph makes sense to us, i.e., a Type 4Guidance (with a capital “G”) versus small “g” guidance: SR 15-19 eliminates certain explicit requirements but leaves a void and provides no official “Guidance” of its own. difference.
4.G. Scenario Design
SR 15-18’s appendix is a little over three times longer than is 15-19’s. However, and again, much of the extra guidance in 15-18 instructs how to perform the work required in both documents. In addition, what may not be required for capital planning purposes for 15-19 banks, e.g., multiple scenarios, is still required to satisfy SR 12-7, which we anticipate will be enforced more than it has been in the past. Again, in the Differences box, the Fed states, “A firm subject to Category II or III standards is not expected to use multiple scenarios in its capital planning process.” That qualifier, “in its capital planning process,” is very specific. SR 15-19 does not absolve firms from complying with SR 12-7’s principles.
4.H. Risk-weighted Asset (RWA) Projections
SR 15-18’s appendix is almost five times longer than is 15-19’s. We would classify much of the difference as Type 4Guidance (with a capital “G”) versus small “g” guidance: SR 15-19 eliminates certain explicit requirements but leaves a void and provides no official “Guidance” of its own.: 15-18 provides guidance or direction that 15-19 banks are likely to follow, too. However, 15-18 firms do have additional burdens related to providing information to assess the effect of potential changes to eight items; see page 39 of 42 for the details.
4.I. Operational Loss Projections
Again, SR 15-18 provides more details than SR 15-19, but for the most part, they are Type 4Guidance (with a capital “G”) versus small “g” guidance: SR 15-19 eliminates certain explicit requirements but leaves a void and provides no official “Guidance” of its own. differences. 15-19 banks are well-advised to read 15-18 when wondering how to interpret the shorter (and seemingly easier) requirements in SR 15-19.
5. Conclusions & Key Recommendations
In the tabs above, we have reviewed each section and appendix of both documents, and our conclusion is that the Fed’s requirements haven’t changed, much. The message to the SR 15-19 banks remains the same: get the big stuff right.
What Does “Getting the Big Stuff Right” Mean?
To do that, understand your portfolios, risks, and risk drivers. In addition, understand how your models and other approaches capture those risks and possible losses. Be prepared to justify your approaches, and be prepared to justify claims of immateriality.
- Documentation is critical – If it’s not documented, it wasn’t done in the eyes of examiners
- Materiality requires proof – You can’t just say something is immaterial; you have to prove it with evidence
- Consistency is key – Apply materiality criteria consistently across portfolios and models
- SR 12-7 still applies – Many requirements not needed for capital planning are still required for SR 12-7 compliance
- Follow SR 15-18 guidance when in doubt – The safest way to reduce regulatory uncertainty
Final Recommendation: For SR 15-19 banks wondering how to interpret the shorter (and seemingly easier) requirements, we recommend reading SR 15-18 for the detailed guidance that will help ensure compliance and reduce regulatory uncertainty.
Contact Information: If you have questions or concerns, contact us or call 205.423.5668. Our expert team of former risk executives will be happy to advise you.