Institute of International Bankers urges Federal Reserve Board to recalibrate annual stress test framework for international banks’ US operations

The Institute of International Bankers (IIB) submitted a comment letter recommending changes to the Federal Reserve Board’s (FRB) annual stress test framework as it applies to the US operations of internationally headquartered banks. While supporting the FRB’s proposal to average stress test results, the IIB argued that additional calibration changes are needed to ensure individual stress test components better reflect asset-level risks and the overall risk profiles of participating firms. The letter recommends revising the threshold for applying the global market shock component so that firms in Category III and below are excluded, noting that only two intermediate holding companies are currently captured outside Category I US global systemically important banks and that these firms are materially smaller and have different trading portfolio risk characteristics. It also calls for eliminating the dividend add-on component of the stress capital buffer for intermediate holding companies, arguing that the structure disadvantages subsidiaries that generally cannot return capital through share repurchases. On operational risk, the IIB urged US banking agencies to continue excluding intermediate holding companies (as Category III or IV institutions) from operational risk elements of risk-weighted asset determinations in any future Basel III Endgame proposal, and said that if operational risk is included in both stress tests and revised risk-weighted asset rules, the framework should be recalibrated downward and amended to avoid compounding operational risk stresses.