How is the Stress Capital Buffer (SCB) calculated and what are its implications?

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AcadiFi · Accepted Answer

The Stress Capital Buffer (SCB) is a firm-specific CET1 requirement set annually by the Federal Reserve based on CCAR results. It replaces the flat 2.5% capital conservation buffer for CCAR-participating BHCs. The formula is: SCB = max(starting CET1 ratio - minimum projected CET1 ratio under severely adverse, 2.5%) + four quarters of planned common dividends as a percent of stressed RWA. The floor of 2.5% ensures the SCB cannot be lower than the standard capital conservation buffer. For a worked example, consider Riverstone Bancorp with starting CET1 of 12.8%, trough CET1 under severely adverse of 9.2%, and planned four-quarter common dividends of 0.4% of RWA. The peak-to-trough decline is 3.6%, plus 0.4% dividends = 4.0% SCB. Its total CET1 requirement becomes 4.5% (minimum) + 4.0% (SCB) + any applicable G-SIB surcharge (say 1.5%) + any countercyclical buffer = 10.0%. Implications for capital planning: (1) Banks manage not just to a CET1 ratio but to stress resilience, because trough CET1 drives the SCB. (2) Share buybacks are NOT in the SCB formula (a change from earlier proposals) — this is favorable for firms that return capital via repurchases rather than dividends. (3) If the SCB exceeds the maximum current payout buffer, automatic payout restrictions apply on a graduated scale. ```mermaid flowchart LR A[CET1 start] --> B[Stress
trough] B --> C[Peak-trough
decline] C --> D[+ 4Q
dividends] D --> E[SCB
floor 2.5%] ``` FRM exam: memorize the SCB formula and the floor.

How is the Stress Capital Buffer (SCB) calculated and what are its implications?

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