August 7, 2020

Mr. John M. Turner, Jr. 

President and Chief Executive Officer 

Regions Financial Corporation

1900 Fifth Avenue North

Birmingham, AL 35203

Subject: Response to request for reconsideration of the stress capital buffer requirement, 

pursuant to the Board’s capital plan rule

Dear Mr. Turner:

This letter is in response to the request by Regions Financial Corporation 

(“Regions”) for reconsideration of the stress capital buffer requirement provided to 

Regions by the Board on June 25, 2020. For the reasons stated below, the Board has 

affirmed the stress capital buffer requirement previously provided to Regions. 

I. Background

The Board’s capital plan rule1 establishes the Board’s process for determining the 

stress capital buffer requirement applicable to a firm subject to the capital plan rule. 

Pursuant to that rule, the Board generally will provide a firm with notice of its stress 

capital buffer requirement by June 30 of each year in which the firm submits an annual

capital plan.

2

 On June 25, 2020, the Board provided Regions with notice that its stress 

capital buffer requirement associated with its 2020 annual capital plan submission is 

3.0 percent.

3

 1

 12 CFR 225.8.

2

 12 CFR 225.8(h)(1).

3

 See email regarding 2020 CCAR Results (June 25, 2020).
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The capital plan rule permits a firm to request reconsideration of the stress capital 

buffer requirement within 15 calendar days of receiving notice of the requirement.4 

Regions requested reconsideration of its stress capital buffer requirement on July 10, 

2020. The capital plan rule generally provides that the Board will notify a firm of the 

Board’s decision to affirm or modify the firm’s stress capital buffer requirement within 

30 calendar days of receipt of the firm’s request for reconsideration, or within 30 days of 

the conclusion of an informal hearing regarding such a request.5

In each year in which a firm submits an annual capital plan, the Board generally 

will provide the firm with a final stress capital buffer requirement, as well as 

confirmation of the firm’s final planned capital distributions for that year, by August 31.6

Unless otherwise determined by the Board, the final planned capital distributions and 

final stress capital buffer requirement for a given year become effective on October 1 of 

that year.

7

 A stress capital buffer requirement that becomes effective will remain 

effective until superseded.8

II. Stress Testing Framework

The stress capital buffer requirement is established based, in part, on the results of 

a supervisory stress test conducted by the Board. Specifically, a firm’s stress capital 

buffer requirement is the greater of 2.5 percent or the following calculation: (1) the 

difference between the firm’s starting and minimum projected common equity tier 1 

(CET1) capital ratios under the severely adverse scenario in the Board’s supervisory 

stress test plus (2) the sum of the dollar amount of the firm’s planned common stock 

dividends for each of the fourth through seventh quarters of the planning horizon9 as a 

percentage of risk-weighted assets.

10 The stress capital buffer requirement provided to 

 4

 12 CFR 225.8(h)(2)(i) and (j)(2).

5

 12 CFR 225.8(j)(5)(ii).

6

 12 CFR 225.8(h)(4)(i).

7

 12 CFR 225.8(h)(4)(ii)(A).

8

 12 CFR 225.8(h)(4)(ii)(B).

9

 The planning horizon is the period of at least nine consecutive quarters over which the 

relevant projections extend, beginning with the quarter preceding the quarter in which the 

firm submits its capital plan.

10 12 CFR 225.8(f)(2).
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Regions on June 25, 2020, was calculated based on 2020 supervisory stress test results 

released by the Board.11

The results of the Board’s supervisory stress tests are projected using a set of 

models developed or selected by the Federal Reserve that take as inputs (1) the 

supervisory scenarios created by the Federal Reserve and (2) firm-provided data on the 

firm’s financial condition and risk characteristics. To provide firms and the public with 

greater transparency regarding the Board’s process for designing supervisory scenarios 

for stress testing, in 2013 the Board finalized the Scenario Policy Statement. 

Consistent with the principles described in the Stress Testing Policy Statement, 

the Federal Reserve designed the system of models so they would result in projections 

that are (1) from an independent supervisory perspective; (2) forward-looking; 

 11 See Board of Governors of the Federal Reserve System, Dodd-Frank Act Stress Test 

2020: Supervisory Stress Test Results (June 2020), available at 

https://www.federalreserve.gov/publications/files/2020-dfast-results-20200625.pdf. On 

February 5, 2019, the Board released materials intended to increase the transparency of 

the stress testing program. 

See https://www.federalreserve.gov/newsevents/pressreleases/bcreg20190205a.htm. 

First, the Board updated the Policy Statement on the Scenario Design Framework for 

Stress Testing (“Scenario Policy Statement”) to provide additional information regarding 

the path of home price variables, in particular, reducing uncertainty about the path of 

these variables in the severely adverse scenario. Second, the Board adopted a final Stress 

Testing Policy Statement to provide additional information about the Board’s principles 

and policies with regard to the development and validation of supervisory stress test 

models. See 12 CFR part 252, Appendix A. As described in the Stress Testing Policy 

Statement, material changes to the supervisory stress test models are phased in over two 

years to reduce year-over-year volatility stemming from updates to the supervisory 

models. The Stress Testing Policy Statement defines a model change as highly material 

if its use results in a change in the CET1 ratio of 50 basis points or more for one or more 

firms, relative to the model used in prior years’ supervisory exercises. See 12 CFR 252, 

Appendix B 2.3. This approach contributes to the stability of the results of the 

supervisory stress test by ensuring that changes in model projections primarily reflect 

changes in underlying risk factors and scenarios, year over year. Third, the Board 

provided additional information about the models used in the supervisory stress test. See

84 Fed. Reg. 6784 (February 5, 2019). The Board is committed to continuing to provide 

additional information, including modeled loss rates by loan and borrower characteristics, 

about its stress test models, as it has done most recently for its corporate loan and credit 

card models.
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(3) consistent and comparable across covered companies; (4) generated from simple 

approaches, where appropriate; (5) robust and stable; (6) conservative; and (7) able to 

capture the effect of economic stress.12

The Federal Reserve’s models rely on detailed portfolio data provided by firms 

but generally do not rely on models or estimates provided by firms, consistent with the 

modeling principle that emphasizes an independent perspective.

The Federal Reserve generally develops its models under an industry-level 

approach that is calibrated using data from many financial institutions. This approach 

reflects modeling principles that favor models resulting in consistent, comparable, and 

forward-looking projections. The Federal Reserve models the response of specific 

portfolios and instruments to variations in macroeconomic and financial scenario 

variables such that differences across firms are driven by differences in firm-specific 

input data, as opposed to differences in model parameters and specifications. As a result, 

two firms with the same portfolio receive the same results for that portfolio in the 

supervisory stress test, facilitating the comparability of results. In addition, the industrylevel approach promotes a forward-looking stress test, as it results in models that do not 

assume that historical patterns will necessarily continue into the future for individual 

firms. These policies also help to ensure that consistent and comparable supervisory 

models are forward-looking, robust, and stable.13

 12 See 12 CFR part 252, Appendix A.

13 While the Federal Reserve limits the use of firm-specific fixed effects and the use of 

dummy variables indicating a loan vintage or specific year, it makes exceptions where 

appropriate. For example, the Federal Reserve may use firm-specific indicator variables, 

firm-provided estimates, or third-party models or data in instances in which it is not 

possible or appropriate to create a supervisory model for use in the stress test, including 

when supervisory data are insufficient to support an independently modeled estimate of 

losses or revenues. However, the Federal Reserve does not adjust supervisory projections 

for individual firms or implement firm-specific overlays in the supervisory stress test. 

This policy ensures that the supervisory stress test results are determined solely by 

supervisory models and firm-specific input data. The Federal Reserve has instituted a 

policy of not using additional input data submitted by one or more of the covered 

companies unless comparable data can be collected from all the firms that have material 

exposure in a given area.
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III. Discussion

As required by the Board’s capital plan rule, Regions’ request for reconsideration 

of its stress capital buffer requirement included a detailed explanation of why it contends 

that reconsideration should be granted.14 

To ensure that review of Regions’ request would be conducted with an 

independent perspective, a group of experts within the Federal Reserve System, who are 

independent of the staff who developed the models, analyzed the arguments made by 

Regions in favor of reconsideration of its stress capital buffer requirement.

15 With 

respect to each of the issues raised in the request of Regions, the experts considered 

whether the request identified any errors in the firm’s stress test results and whether each

stress test model identified in the firm’s request is operating as intended, within the 

bounds of the Board’s published policies. The information in this letter regarding the 

Board’s stress testing policies and supervisory modeling practices was previously 

publicly disclosed, consistent with the Board’s practice to increase the transparency of 

the stress testing program.16

In its request, Regions argues that the Board’s approach to estimating preprovision net revenue (PPNR) may exclude certain data elements that significantly 

reduce its structural exposure to persistently low interest rates. In particular, Regions 

claims that the Board’s approach to estimating PPNR may exclude the impact of interest 

rate hedges, because the hedges were structured to activate in the future and the Federal 

Reserve’s PPNR model is based on historical data. The firm had executed hedges that 

convert floating rate commercial and industrial loans to fixed-rate loans under certain 

conditions. While the hedges were executed in 2018 and 2019, they were structured to 

activate in 2020. With respect to this argument, the Board has assessed Regions’ stress 

test results and Federal Reserve models for errors. Through this assessment, the Board

 14 See 12 CFR 225.8(j)(3)(i).

15 This group is composed of staff members not involved in supervisory modeling, 

supplemented by subject-matter experts from across the Federal Reserve System. This 

group’s model validation process includes reviews of model performance; conceptual 

soundness; and the processes, procedures, and controls used in model development, 

implementation, and the production of results. See Board of Governors of the Federal 

Reserve System, Dodd-Frank Act Stress Test 2020: Supervisory Stress Test Methodology

at 7 (March 2020), available at https://www.federalreserve.gov/publications/files/2020-

march-supervisory-stress-test-methodology.pdf.

16 See supra note 11.
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did not identify any errors in Regions’ stress test results and has determined that the 

models operated as intended, within the bounds of the Board’s published policies.

The PPNR models capture a firm’s average performance, as measured based on 

recent historical data, for a particular revenue or expense category, while still allowing 

for variation in response to changes in macroeconomic conditions. The models have 

been developed in accordance with the Board’s principles of simplicity and conservatism. 

Therefore, the firm’s data on its interest rate hedges are outside the scope of current 

modeling. Many firms use hedging strategies to minimize losses; however, the Board has 

instituted a policy of not using additional input data submitted by one or more firms 

unless comparable data can be collected from all the firms that have material exposure in 

a given area. This promotes consistency across the stress test results of covered 

companies.17 In addition, because the models are based on historical data, they would 

not capture hedges that have prospective application. Accordingly, the Board is

following the publicly stated policy.

IV. Conclusion

After consideration of the Board’s stress testing policies and all relevant facts, 

including the information provided in the request, and consistent with the Board’s 

regulations, the Board has determined to affirm the stress capital buffer requirement 

provided to Regions on June 25, 2020. The Board notes that it is focused on 

continuously improving the stress testing framework, including the Board’s supervisory 

models. With regard to the arguments raised by Regions in the request for 

reconsideration, the Board has directed Federal Reserve staff to investigate and address, 

as appropriate, the treatment of interest-rate hedges in projecting PPNR to see if any 

future improvements can be made. In evaluating any of its supervisory models, the 

Board follows the processes for development, implementation, and validation of its 

supervisory models, as outlined in the Board’s Stress Testing Policy Statement. 

The final stress capital buffer requirement for Regions is 3.0 percent. The Board 

hereby confirms that the planned capital distributions Regions submitted as part of its 

2020 capital plan submitted on April 5, incorporating any adjustments made pursuant to 

12 CFR 225.8(h)(2), are final. Regions’ final stress capital buffer requirement and final 

planned capital distributions are effective October 1, 2020. The Federal Reserve supports 

banking organizations that choose to use their capital buffers to lend and undertake other 

 17 See 12 CFR part 252, Appendix B 2.8.
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supportive actions in a safe and sound manner.18 When using their buffers, banking 

organizations may make capital distributions up to prescribed limits, which include 

automatic limitations in the capital framework, as well as any additional limitations 

determined by the Board.19 

Please contact Hillel Kipnis at (202) 452-2924 with any questions.

Sincerely yours,

Margaret McCloskey Shanks

Deputy Secretary of the Board

cc: Bess Tang, Assistant Vice President

Susan Goldberg, Director of Examinations

Federal Reserve Bank of Atlanta

 18 See Interagency Statement on the Use of Capital and Liquidity Buffers (March 17, 

2020), available at

https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200317a.htm. 

19 A “capital buffer” refers to capital held above regulatory minimum 

requirements. Banking organizations with regulatory capital ratios that are below their 

capital buffer requirement face gradual restrictions on capital distributions and 

discretionary bonus payments. See 12 CFR 217.11(c). These restrictions encourage 

banking organizations to conserve capital within the organization as they lend to 

households and businesses and as their capital levels approach minimum regulatory 

capital requirements. Capital buffers were designed to provide banking organizations 

with the means to support the economy in adverse situations and to allow banking 

organizations to continue to serve households and businesses.