Institute of International Bankers recommends changes to the Federal Reserve’s stress test transparency and capital planning proposal

The Institute of International Bankers (IIB) submitted a comment letter to the Board of Governors of the Federal Reserve System on its proposal to increase transparency and public accountability in the supervisory stress testing framework, alongside proposed modifications to capital planning requirements, the Stress Capital Buffer and enhanced prudential standards. While supporting the direction of greater transparency, the IIB calls for targeted refinements to model calibration and risk sensitivity that it says would better reflect the business models of internationally headquartered financial institutions operating in the United States. Key recommendations include incorporating transfer pricing arrangements into pre-provision net revenue (PPNR) and allowing additional risk-mitigating hedges to have a beneficial effect on PPNR, on the basis that current PPNR modeling may understate non-interest revenue and overstate risk exposure for internationally headquartered firms. The letter also proposes allowing deferred tax assets from timing differences throughout the stress horizon by applying existing capital-rule deduction and risk-weighting treatment, citing greater uniformity across firms and reduced administrative burden. In addition, the IIB urges the Federal Reserve to revise the threshold for applying the global market shock component of the annual stress test to exclude firms in Category III and below, noting that only two intermediate holding companies beyond Category I U.S. global systemically important banks are currently subject to that component and are materially smaller than U.S. GSIBs.