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Comprehensive Capital Analysis and Review 2014: Summary Instructions and Guidance

Supervisory Stress Testing and Capital Plan Assessments

To support its assessment of the capital plans, the Federal Reserve will review the supporting analyses in a BHC's capital plan, including the BHC's own stress test results, and will generate supervisory estimates of losses; revenues; loan-loss reserves; balance sheet components and RWAs; and pro forma, post-stress capital ratios using internally developed supervisory models and assumptions wherever possible. Supervisory models and assumptions will be applied in a consistent manner across all BHCs. Where it may not be feasible to develop results directly through the use of supervisory models, the Federal Reserve may incorporate into its supervisory estimates one or more of the following: (1) BHC estimates, reviewed and adjusted (where applicable) by the Federal Reserve to ensure the scenario was applied as specified and that the BHC's assumptions of potential losses and earnings reflect a credible and conservative translation of the impacts from the stress scenario; (2) third-party models; and (3) simple decision rules using conservative assumptions consistently applied across all BHCs.

Quantitative Assessments

The various types of quantitative assessments that the Federal Reserve expects to consider are described in figure 2.

Figure 2. Quantitative assessments of capital actions

Quantitative assessments of capital actions
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Note: Each box indicates a distinct scenario that will be submitted by each BHC. Planned capital actions are estimated by each BHC using the BHC baseline scenario and the alternative capital actions are estimated under the BHC's stress scenario in accordance with the BHC's internal capital policies.

* If a BHC determines the supervisory baseline scenario to be appropriate for their own BHC baseline, the BHC may submit identical FR Y-14A Summary schedules with the exception of the capital worksheets noted above. All BHCs must complete two capital worksheets for the supervisory baseline and supervisory severely adverse scenario.

Pro Forma Capital Ratios

As part of CCAR, the Federal Reserve will use BHCs' planned capital actions in the BHC baseline scenario as the actions that are subject to supervisory evaluation in the baseline scenario and in the supervisory adverse and severely adverse scenarios. In other words, the Federal Reserve will in part be assessing whether a BHC would be capable of continuing to meet minimum capital requirements (the leverage, tier 1 risk-based, common equity tier 1 risk-based, and total risk-based capital ratios) and a tier 1 common capital ratio of at least 5 percent throughout the planning horizon even if adverse or severely adverse stress conditions emerged and the BHC did not reduce planned capital distributions.

A quantitative assessment of the appropriateness of planned capital actions will also be evaluated based on its common dividend payout ratio (common dividends relative to net income available to common shareholders) in the baseline scenarios, and its projected path to compliance with the revised regulatory capital rule under the supervisory baseline scenario as the revised regulatory capital framework is phased in.

Changes to proposed capital distributions after the initial submission may require submission of a revised plan in a subsequent quarter.45 The Federal Reserve will use the dollar amount of distributions contained in a BHC's FR Y-14A when assessing capital plans. The Federal Reserve's decision to object, or issue a notice of non-objection, to a capital plan will be specific to each BHC's planned capital actions.

Common Dividend Payouts

The Federal Reserve expects that capital plans will reflect conservative common dividend payout ratios. In particular, requests that imply common dividend payout ratios above 30 percent of projected after-tax net income available to common shareholders in either the BHC baseline or supervisory baseline will receive particularly close scrutiny.

Regulatory Capital Rule Transition Plans

As part of CCAR, the Federal Reserve will continue to evaluate whether the proposed capital actions are appropriate in light of the BHC's plans to meet the requirements of the revised regulatory capital rule on a fully phased-in basis. As part of its capital plan submission, a BHC should provide a transition plan that includes pro forma estimates under baseline conditions of the BHC's regulatory risk-based capital and leverage ratios under the revised regulatory capital rule. As stated in the September 2010 Group of Governors and Heads of Supervision agreements, 46 BHCs that meet the minimum ratio requirement during the transition period per the revised regulatory capital rule, but that remain below the 7 percent tier 1 common equity target (minimum plus conservation buffer), will be expected to maintain prudent earnings-retention policies with a view to meeting the conservation buffer under the time frame described in the revised capital framework.47

In July 2013, the Basel Committee on Banking Supervision published its updated methodology for assessing a higher loss-absorbency requirement for global systemically important banks (SIFI surcharge).48 Each BHC's regulatory capital transition plan should incorporate management's best estimate of the likely SIFI surcharge that would be assessed under this methodology (and any updates published since that time) and a description of how this estimate was derived. The Federal Reserve expects that BHCs will demonstrate with great assurance that, inclusive of a SIFI surcharge, they can achieve the required ratios readily and without difficulty, inclusive of any planned capital actions.

A BHC should, through its capital plan, demonstrate an ability to maintain no less than steady progress along a path between its existing capital ratios based upon the revised regulatory capital rule and the fully phased-in requirements in 2019 (see figure 3). The Federal Reserve will closely scrutinize plans that fall short of this supervisory expectation. Some BHCs may exceed the transition targets over the near term, but not yet meet the fully phased-in targets. Those BHCs are expected to submit plans reflecting steady accretion of capital at a sufficient pace to demonstrate continual progress toward full compliance with the revised regulatory capital rule on a fully phased-in basis.

Figure 3. Regulatory capital transitions evaluation path

Regulatory capital transitions evaluation path
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Note: Zone 1 indicates that the BHC already meets the fully phased-in target ratios (common equity tier 1, tier 1 risk-based, tier 1 leverage, supplemental leverage) over the entire forecasted period (i.e., Q3 2013 to Q4 2018).
Zone 2 indicates that the BHC meets the steady progress path.
Zone 3 indicates that the BHC meets the transitional targets, but without steady progress.
Zone 4 indicates that the BHC does not meet the transitional targets.

The Federal Reserve expects that any BHC performance projections that suggest that ratios would fall below the regulatory minimums at any point over the projection period would be accompanied by proposed actions that reflect affirmative steps to improve the BHC's capital ratios, including actions such as external capital raises, to provide great assurance that the BHC will meet the revised regulatory minimums as they phase in.

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Qualitative Assessments

Qualitative assessments are also a critical component of the CCAR review. Even if the supervisory stress test for a given BHC results in a post-stress tier 1 common capital ratio exceeding 5 percent and other regulatory capital ratios above the minimums, the Federal Reserve could nonetheless object to that BHC's capital plan for other reasons. These reasons include the following:

  • There are outstanding material unresolved supervisory issues.
  • Assumptions and analyses underlying the BHC's capital plan are inadequate.
  • The BHC's capital adequacy process, including the risk-measurement and risk-management practices supporting this process, as well as the governance and controls around these practices, are not sufficiently robust.
  • The CCAR assessment results in a determination that a BHC's CAP or proposed capital distributions would otherwise constitute an unsafe or unsound practice, or would violate any law, regulation, Board order, directive, or any condition imposed by, or written agreement with, the Board.49

As noted previously, the Federal Reserve has differing expectations for BHCs of different sizes, scope of operations, activities, and systemic importance in various aspects of capital planning. For purposes of capital planning, the Federal Reserve expects the largest, most complex BHCs to have the most sophisticated, comprehensive and robust capital planning practices. In addition, the Federal Reserve recognizes the challenges facing BHCs that are new to CCAR and recognizes that these BHCs will continue to develop and enhance their capital planning systems and processes to meet supervisory expectations.

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45. See sections 225.8(d)(4) and (f) of the capital plan rule. 12 CFR 225.8(d)(4) and (f). Return to text

46. See Basel Committee on Banking Supervision (2010), "Group of Governors and Heads of Supervision Announce Higher Global Minimum Capital Standards," press release, September 12,  Leaving the BoardReturn to text

47. See Regulatory Capital Rules, note 7Return to text

48. 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),  Leaving the BoardReturn to text

49. See section 225.8(e)(2)(ii) of the capital plan rule. 12 CFR 225.8(e)(2)(ii). Return to text

Last update: November 20, 2013

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