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BOARD OF GOVERNORS

OF THE

FEDERAL RESERVE SYSTEM

WASHINGTON, D.C. 20551

DIVISION OF SUPERVISION

AND REGULATION

SR 20-5

March 19, 2020

TO THE OFFICER IN CHARGE OF SUPERVISION AT EACH

FEDERAL RESERVE BANK

SUBJECT: Questions and Answers (Q&As) on Statement Regarding the Use of Capital 

and Liquidity Buffers

Applicability: These Q&As are relevant to all Federal Reserve supervised institutions, 

regardless of asset size.

The Federal Reserve Board and the other federal banking agencies developed the 

attached document to respond to public inquiries from banking organizations regarding the use 

of their capital and liquidity buffers, and the application of the Board’s total loss-absorbing 

capacity rule. These Q&As were developed to provide further information on the March 17, 

2020, Joint Statement on Statement on the Use of Capital and Liquidity Buffers.

1 As discussed 

in the Q&As, the agencies support banking organizations that choose to use their capital and 

liquidity buffers to lend and undertake other supportive actions in a safe and sound manner. The 

agencies expect banking organizations to continue to manage their capital actions and liquidity 

risk prudently.

Reserve Banks are asked to distribute this letter to the Federal Reserve-supervised 

institutions in their districts, as well as to their supervisory and examination staff. Questions 

may be sent via the Board’s public website.2

Michael S. Gibson

Director

Attachment: 

• Q&As on Statement Regarding the Use of Capital and Liquidity Buffers

 1 Refer to the March 17, 2020, Joint Statement on Statement on the Use of Capital and Liquidity Buffers, in the 

interagency press release at: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200317a.htm

2 See http://www.federalreserve.gov/apps/contactus/feedback.aspx.
Attachment to SR 20-5

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Q&As on Statement Regarding the Use of Capital and Liquidity Buffers

The Board, FDIC, and Office of the Comptroller of the Currency (agencies) are encouraging 

banking organizations to use their capital and liquidity buffers as they respond to the challenges 

presented by the effects of the coronavirus.

Since the global financial crisis of 2007-2008, U.S. banking organizations have built up 

substantial levels of capital and liquidity in excess of regulatory minimums and buffers. The largest 

banking organizations hold $1.3 trillion in common equity and $2.9 trillion in high quality liquid assets 

(HQLA). The agencies also significantly increased capital and liquidity requirements, including 

improving the quality of regulatory capital, raising minimum capital requirements and establishing 

capital and liquidity buffers, and implementing annual capital stress tests.

These capital and liquidity buffers were designed to provide banking organizations with the 

means to support the economy in adverse situations and allow banking organization to continue to serve 

households and businesses. The agencies support banking organizations that choose to use their capital 

and liquidity buffers to lend and undertake other supportive actions in a safe and sound manner. The 

agencies expect banking organizations to continue to manage their capital actions and liquidity risk 

prudently.

These Q&As respond to public inquiries from banking organizations regarding the use of their 

capital and liquidity buffers, and the application of the Board’s total loss-absorbing capacity rule.

Q&As by Topic

Liquidity Buffers

1. Could the agencies clarify the meaning of a “liquidity buffer” and provide further 

information on how a banking organization is allowed to use such a buffer in times of 

stress?

“Liquidity buffer” refers to the stock of liquid assets that a banking organization manages to 

enable it to meet expected and unexpected cash flows and collateral needs without adversely 

affecting the banking organization’s daily operations. Supervisors encourage banking 

organizations to make prudent use of their liquidity buffers in times of stress in order to continue to 

meet obligations to creditors and other counterparties while also continuing to support households 

and businesses. 

If a banking organization is subject to the liquidity coverage ratio and its liquidity coverage 

ratio is less than 100 percent, it must submit a plan to its supervisor. The plan must be appropriate 

to the circumstances of the banking organization and the economic environment; there is no 

requirement to rebuild HQLA within a specific time period. 

The supervisory response to a banking organization that has a liquidity buffer that falls 

below any applicable regulatory requirements will depend on the particular facts and circumstances 

facing the firm. Supervisors will engage with management on the banking organization’s plan for 

rebuilding its liquidity buffer. In addition, supervisors will not change the supervisory assessment 

and rating of a banking organization solely on this basis. 
Attachment to SR 20-5

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2. Could the agencies provide clarity on the purpose of the 90-day draws on the discount 

window and whether prepayment would impact the maturity of the loan for LCR 

purposes? 

The agencies are encouraging banking organizations to use the discount window to meet 

their liquidity needs, especially as banks deploy their liquid assets to support the needs of 

households and businesses; the Board has made changes to the program to encourage its use. 

Borrowing from the discount window is now available up to 90 days, and this borrowing receives 

favorable treatment under the agencies’ liquidity coverage ratio rule. In terms of prepayment, as 

the U.S. government is the counterparty, the liquidity coverage ratio rule allows a firm to assume 

the original maturity date. 

Capital Buffers

3. Could the agencies clarify the meaning of a “capital buffer,” and the meaning of 

regulatory minimums and provide further information on how a banking organization

is allowed to use such a buffer in times of stress?

“Capital buffer” refers to capital held above regulatory minimum requirements. The statement 

on use of capital buffers reinforced the principle that is appropriate for banking organizations to use 

their buffers in times of stress to lend and undertake other actions that support the economy in a safe 

and sound manner. 

Banking organizations with regulatory capital ratios that are below their capital buffer

requirement face gradual restrictions on capital distributions and discretionary bonus payments. 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. The statement itself did not modify the levels or distribution restrictions associated with 

the buffers in the capital rule or change the agencies’ prompt corrective action regulations. However, 

on March 17, 2020, the agencies modified the buffer restrictions by revising the definition of eligible 

retained income through an interim final rule to ensure the automatic restrictions apply gradually as 

intended.1

 By increasing the amount of retained income available for distribution, this modification 

will allow banking organizations to dip into their capital buffers and continue lending without facing 

abrupt regulatory restrictions.

Recovery and Resolution Plan Triggers

4. How does the statement on buffer usability interact with triggers included in a 

recovery plan or a resolution plan?

Recovery and resolution plans for some of the largest banking organizations contain triggers

that identify when and under what conditions a firm is transitioning from business-as-usual conditions 

to a stress period. Early triggers are generally focused on prompting appropriate internal 

governance processes and an initial conversation between supervisors and the firm. 

 1 See https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200317a.htm
Attachment to SR 20-5

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Total Loss-Absorbing Capacity Rule

5. Could the Board confirm whether the statement related to Use of Capital and

Liquidity Buffers applies to total loss-absorbing capacity and long-term debt 

requirements?

Similar to the capital rule, the Board’s total loss-absorbing capacity rule includes minimum 

requirements of total loss-absorbing capacity and long-term debt, as well as buffers in excess of 

such requirements that impose increasingly stringent restrictions on distributions as a banking 

organization approaches the minimum requirements. Consistent with the interagency statement 

regarding the use of capital buffers, the Board encourages banking organizations to use their total 

loss-absorbing capacity buffers to lend and undertake other supportive actions in a safe and sound 

manner.

A banking organization whose loss-absorbing capacity and long-term debt ratios fall into 

the buffers would be subject to restrictions on its capital distributions, which helps to ensure that 

banking organizations conserve capital as they lend to households and businesses.