Capital Planning at Large Bank Holding Companies: Supervisory Expectations and Range of Current Practice
- Estimation Methodologies for Losses, Revenues, and Expenses
- Assessing Capital Adequacy Impact
- Concluding Observations
The goal of this publication is to outline the Federal Reserve's expectations for internal capital planning at large BHCs and to highlight the range of current practice as observed during the 2013 CCAR. This discussion is intended to provide a more comprehensive set of criteria to assist BHC management in assessing their current capital planning processes and in designing and implementing improvements to those processes, as well as to provide insight to a broader audience about the key aspects of BHCs' capital planning practices.
Internal capital planning practices have evolved considerably since the financial crisis and the implementation of the Federal Reserve's Capital Plan Rule in 2011. BHCs have made advances in the identification and measurement of the risks to their capital and in the integration of stress testing and capital planning into their broader strategic planning processes. The fundamental insight governing the Federal Reserve's expectations about capital planning is the importance of having a forward-looking perspective on the risks to a BHC's capital resources under severely stressful conditions. In particular, a forward-looking perspective involves understanding how a BHC's revenue-generating capacity and potential losses could be affected in stressed economic and financial market conditions; understanding the particular vulnerabilities arising from its business model and activities; and having a capital policy in place that governs the BHC's capital actions under both "normal" and stressed economic conditions. These elements represent substantial conceptual and operational improvements in capital planning that go well beyond simple consideration of current and expected future capital ratios.
While many of the large BHCs subject to the Capital Plan Rule have made substantial improvements in capital planning, there is still considerable room for advancement across a number of dimensions. Areas where some BHCs continue to fall short of leading practice include
- not being able to show how all their risks were accounted for in their capital planning processes;
- using stress scenarios and modeling techniques that did not address the particular vulnerabilities of the BHC's business model and activities;
- generating projections for at least some components of loss, revenue, or expenses using approaches that were not robust, transparent, and/or repeatable, or that did not fully capture the impact of stressed conditions;
- having capital policies that did not clearly articulate a BHC's capital goals and targets, did not provide analytical support for how these goals and targets were determined to be appropriate, and/or were not comprehensive or detailed enough to provide clear guidance about how the BHC would respond as its capital position changed in different economic circumstances; and
- having less-than-robust governance or controls around the capital planning process, including around fundamental risk-identification, -measurement, and -management practices that are among the critical elements that support robust capital planning.
All the BHCs that participated in CCAR faced challenges across one or more of these areas. And although many BHCs demonstrated leading practices in several dimensions of capital planning, the leading capital planning practices identified in this paper will continue to evolve as new data become available, economic conditions change, new products and businesses introduce new risks, and estimation techniques advance further. As the frontier of capital planning practice advances, the Federal Reserve's expectations for how BHCs implement the requirements of the Capital Plan Rule and the related company-run stress testing required under the Dodd-Frank Act will also evolve.51 Such advances in capital planning practices will enhance the health and stability of individual BHCs and of the overall banking system.
51. 12 CFR part 252, subpart G. Return to text