Comprehensive Capital Analysis and Review 2013: Assessment Framework
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 manage their capital. 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.
Accordingly, through CCAR the Federal Reserve seeks to ensure that large BHCs have thorough and robust processes for managing their capital resources. Such processes should be supported by effective firm-wide risk-measurement and -management practices and ongoing consideration of the potential for stressful outcomes, with strong oversight by boards of directors and senior management. The Federal Reserve expects each BHC to incorporate, as part of its capital planning process, analysis of the potential for significant and rapid changes in the risks it faces, including risks generated by a marked deterioration in the economic and financial environment as well as pressures that may stem from firm-specific events.
CCAR is also designed to help both the BHC and the Federal Reserve evaluate whether a BHC's capital accretion and distribution decisions are prudent, given inherent uncertainty about the future. The CCAR process also can help to act as a counterweight to pressures that a BHC may face to use capital distributions to signal financial strength, even in a stressed environment.
Capital is central to a BHC's ability to absorb losses and continue to lend to creditworthy businesses and consumers. The recent financial crisis illustrated that confidence in the capitalization and overall financial strength of a BHC can erode rapidly in the face of changes in current or expected economic and financial conditions. More importantly, the crisis illustrated that a loss of investor and counterparty confidence in the financial strength of a BHC might not only imperil that BHC's viability, but also harm the broader financial system.
CCAR reflects a number of important steps forward in the Federal Reserve's approach to the supervision of the largest BHCs. Rather than evaluating capital at a moment in time, CCAR incorporates a forward-looking, post-stress evaluation of a BHC's capital adequacy. Further, the Federal Reserve in CCAR expands upon other supervisory practices by undertaking a simultaneous, horizontal assessment of capital adequacy at the largest U.S. BHCs, thus allowing the process to be informed by the financial condition of, and outlook for, these BHCs individually and as a group.
The remainder of this report summarizes the results of the Federal Reserve's CCAR, including supervisory estimates of each BHC's post-stress capital ratios under a severely adverse scenario as well as the Federal Reserve's actions on the 2013 capital plans; outlines recent trends in tier 1 common capital at the 18 BHCs; and summarizes the assessment framework that the Federal Reserve used in reviewing the capital plans from both a quantitative and qualitative perspective.