Comprehensive Capital Analysis and Review 2014: Summary Instructions and Guidance
- Supervisory Stress Testing and Capital Plan Assessments
- Federal Reserve Responses to Planned Capital Actions
- Appendix A: Templates for Dodd-Frank Act Stress Testing Results 2014
The Federal Reserve's annual Comprehensive Capital Analysis and Review (CCAR) is an intensive assessment of the capital adequacy of large, complex U.S. bank holding companies (BHCs), and of the practices these BHCs use to asses their capital needs. The Federal Reserve expects these BHCs to have sufficient capital to withstand a severely adverse operating environment and be able to continue operations, maintain ready access to funding, meet obligations to creditors and counterparties, and serve as credit intermediaries.
As indicated in the Federal Reserve Board's rule regarding capital planning (the capital plan rule), the Federal Reserve's annual assessment of capital adequacy for U.S.-domiciled, top-tier BHCs with total consolidated assets of $50 billion or more will include consideration of a BHC's overall financial condition, risk profile, and capital adequacy on a forward-looking basis.1 Assessments will also be made on the overall content of a capital plan and the strength of the BHC's capital adequacy process (CAP), including its capital policy.2 Pursuant to the capital plan rule, each BHC with total consolidated assets of $50 billion or more is required to submit a capital plan approved by the BHC's board of directors, or a committee thereof, for the Federal Reserve's annual CCAR, irrespective of whether the BHC intends to undertake any capital distributions over the planning horizon covered in its capital plan.3 For CCAR 2014, capital plans should be submitted no later than January 6, 2014.4
As outlined in the capital plan rule, the supervisory review of a BHC's capital plan includes an assessment of
- the comprehensiveness of the capital plan, including the suitability of the BHC scenarios, and the extent to which the risk measurement and other analysis underlying the plan capture and appropriately address potential risks stemming from all activities across the BHC under baseline and stressed operating conditions;
- the reasonableness of the BHC's assumptions and analysis underlying the capital plan and a review of the robustness of the BHC's overall CAP; and
- the BHC's capital policy.
Importantly, the Federal Reserve has differing expectations across the various aspects of BHCs' CAP for BHCs of different sizes, scopes of operations, activities, and systemic importance. For example, the Federal Reserve has significantly heightened supervisory expectations for the largest and most complex BHCs--in all aspects of capital planning--and expects these BHCs to have the most sophisticated, comprehensive, and robust capital planning practices. In addition, the Federal Reserve recognizes the challenges facing the 12 BHCs that are new to CCAR and that these BHCs in particular will continue to work to enhance their capital planning systems and processes to meet supervisory expectations.
A BHC's capital plan submission must also include any capital actions a BHC is planning to take over the nine-quarter planning horizon, such as dividends and other capital distributions. The supervisory review of a BHC's capital plan includes an assessment of the BHC's ability to maintain capital levels, inclusive of any capital actions, above each minimum regulatory capital ratio and above a tier 1 common ratio of 5 percent under baseline and stressful conditions throughout the nine-quarter planning horizon.5 See table 1 for a list of the ratios that are applicable to advanced approaches BHCs and other BHCs, respectively, over the planning horizon.6
|Regulatory ratio||Minimum ratio|
|Advanced approaches BHCs|
|Tier 1 common ratio||5 percent||5 percent||5 percent|
|Common equity tier 1 capital ratio||n.a.||4 percent||4.5 percent|
|Tier 1 risk-based capital ratio||4 percent||5.5 percent||6 percent|
|Total risk-based capital ratio||8 percent||8 percent||8 percent|
|Tier 1 leverage ratio||3 or 4 percent||4 percent||4 percent|
|Tier 1 common ratio||5 percent||5 percent||5 percent|
|Common equity tier 1 capital ratio||n.a.||n.a.||4.5 percent|
|Tier 1 risk-based capital ratio||4 percent||4 percent||6 percent|
|Total risk-based capital ratio||8 percent||8 percent||8 percent|
|Tier 1 leverage ratio||3 or 4 percent||3 or 4 percent||4 percent|
Note: The tier 1 common ratio is to be calculated for each planning horizon quarter using the definition of tier 1 capital and total risk-weighted assets as currently in effect in 2013. All other ratios are to be calculated using the definitions of tier 1 capital and approaches to risk-weighting assets that are in effect during a particular planning horizon quarter. See "Regulations Y and YY: Application of the Revised Capital Framework to the Capital Plan and Stress Test Rules," 78 Fed. Reg. 59779 (September 30, 2013).
n.a. Not applicable.
As the table indicates, a BHC's capital plan must reflect the revised capital framework that the Board adopted in connection with implementation of the Basel III accord, including the framework's minimum regulatory capital ratios and transition arrangements.7 A BHC's capital plan is also required to reflect the company's tier 1 common ratio for each quarter of the planning horizon using the definitions of tier 1 capital and total risk-weighted assets as in effect in 2013. The use of the tier 1 common ratio in CCAR 2014 is explained in greater detail in the Federal Reserve's interim final rule "Application of the Revised Capital Framework to the Capital Plan and Stress Test."8 A BHC's capital plan submission must also include a transition plan for full implementation of Basel III, including the BHC's best estimate of any capital surcharge for global systemically important banks.9
The capital plans must reflect the results of each BHC's company-run stress test using three scenarios that the Federal Reserve is providing under the Board's rules implementing sections 165(i)(1) and (2) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA stress test rules). The supervisory scenarios provided by the Federal Reserve are the baseline scenario, the adverse scenario, and the severely adverse scenario. The results of the company-run stress test required under the Dodd-Frank Act should reflect the capital action assumptions required under the DFA stress test rules (DFA stress test capital actions).10 In addition, for the supervisory adverse and severely adverse scenarios, which will inform the CCAR post-stress capital analysis, each BHC must also submit estimated pro forma capital ratios calculated with the BHC's planned capital actions as included in a BHC baseline scenario.
In addition to three supervisory scenarios, each BHC must conduct a stress test based on its own scenarios, including at least one stress scenario (BHC stress scenario) and a baseline scenario (BHC baseline scenario). Each BHC must then submit the results of the BHC baseline scenario using the BHC's planned capital actions and the results of the BHC stress scenario(s) using any alternative capital actions (if applicable). As discussed further below, under certain conditions a BHC can choose to use the supervisory baseline scenario as its own baseline scenario. (See the "Company-Run Stress Testing" section for further discussion of this topic.)
In conducting its supervisory stress tests of BHCs under the DFA stress test rules, the Federal Reserve will use the same scenarios and assumptions as the BHCs are required to use under the DFA stress test rules to project revenues, losses, net income, and pro forma capital ratios.11 In addition, the Federal Reserve will independently project BHCs' balance sheet and risk-weighted assets over the nine-quarter planning horizon, using the same macroeconomic scenarios, to increase the comparability of supervisory stress test results across BHCs.
The Federal Reserve expects to publish both a summary of results of the supervisory stress tests conducted under the DFA stress test rules and a summary of the post-stress capital analysis component of the CCAR results by March 31.12 In both cases, the Federal Reserve expects that the results disclosed will be those resulting from the stress tests under both the supervisory adverse and the supervisory severely adverse scenarios.
Under the DFA stress test rules, BHCs are also required to publish a summary of their stress test results under the supervisory severely adverse scenario (using DFA stress test capital actions) between March 15 and March 31.13 The Federal Reserve expects that the publication of summary results from both the supervisory and company-run stress tests will enhance public information about BHCs' financial condition and the ability of these BHCs to absorb losses as a result of adverse economic and financial conditions.
1. The capital plan rule is codified at 12 CFR 225.8. Asset size is measured as an average over the previous four calendar quarters as reported on the FR Y-9C regulatory report. If a BHC has not filed the FR Y-9C for each of the four most recent consecutive quarters, average total consolidated assets means the average of the company's total consolidated assets, as reported on the company's FR Y-9C, for the most recent quarter or consecutive quarters. Return to text
2. See section 225.8(e)(1)(i) of the capital plan rule. 12 CFR 225.8(e)(1)(i). Return to text
3. The BHCs required to participate in CCAR 2014 are Ally Financial Inc.; American Express Co.; Bank of America Corp.; BMO Financial Corp.; The Bank of New York Mellon Corp.; BB&T Corp.; BBVA Compass Bancshares, Inc.; Capital One Financial Corp.; Citigroup Inc.; Comerica Inc.; Discover Financial Services; Fifth Third Bancorp.; The Goldman Sachs Group, Inc.; HSBC North America Holdings Inc.; Huntington Bancshares Inc.; JPMorgan Chase & Co.; KeyCorp; M&T Bank Corp.; Morgan Stanley; Northern Trust Corp.; The PNC Financial Services Group, Inc.; RBS Citizens Financial Group, Inc.; Regions Financial Corp.; Santander Holdings USA, Inc.; State Street Corp.; SunTrust Banks, Inc.; UnionBanCal Corp., U.S. Bancorp.; Wells Fargo & Co.; and Zions Bancorp. TD Bank US Holding Company and BancWest Corporation are not subject to the capital plan rule until July 21, 2015, under the capital plan rule. See 12 CFR 225.8(b)(2)(i). In addition, Deutsche Bank Trust Corporation has received an extension from compliance with the capital plan rule until June 30, 2014. See www.federalreserve.gov/releases/h2/20130727/h2.pdf. Return to text
4. The capital plan rule requires capital plans to be submitted by January 5; however, the director of the Division of Banking Supervision and Regulation, acting under delegated authority from the Board, has granted an extension of this deadline for purposes of CCAR 2014 because January 5, 2014, falls on a Sunday. See section 225.8(d)(1)(ii) of the capital plan rule. 12 CFR 225.8(d)(1)(ii). Return to text
5. See section 225.8(e)(1)(i) of the capital plan rule. 12 CFR 225.8(e)(1)(i). Return to text
6. For purposes of CCAR 2014, an advanced approaches BHC includes a BHC that has consolidated assets greater than or equal to $250 billion or total consolidated on-balance sheet foreign exposure of at least $10 billion as of December 31, 2013. See Regulatory Capital Rules, infra, note 7; 12 CFR part 225, appendix G, section 1(b). Other BHCs include any BHC that is subject to 12 CFR 225.8 and is not an advanced approaches BHC. Return to text
7. See Department of the Treasury, Office of the Comptroller of the Currency, and Board of Governors of the Federal Reserve System (2013), "Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Capital Adequacy, Transition Provisions, Prompt Corrective Action, Standardized Approach for Risk-Weighted Assets, Market Discipline and Disclosure Requirements, Advanced Approaches Risk-Based Capital Rule, and Market Risk Capital Rule" (Regulatory Capital Rules), 78 Fed. Reg. 62017 (October 11, 2013). Return to text
8. See "Regulations Y and YY: Application of the Revised Capital Framework to the Capital Plan and Stress Test Rules," 78 Fed. Reg. 59779 (September 30, 2013). Return to text
9. See Basel Committee on Banking Supervision (2013), "Global Systemically Important Banks: Updated Assessment Methodology and the Higher Loss Absorbency Requirement," rules text (Basel: BCBS, July), www.bis.org/publ/bcbs255.htm . Return to text
10. 12 CFR 252.146(b). Return to text
11. See id. Return to text
12. 12 CFR 252.136(b) and (c). Return to text
13. 12 CFR 252.148(c). Return to text