Comprehensive Capital Analysis and Review 2013: Assessment Framework
and Results
Print- Introduction
- Summary of Results
- Assessment Framework
Summary of Results
The Federal Reserve conducted the first CCAR in early 2011. In November 2011, the Federal Reserve adopted the capital plan rule, which requires BHCs with consolidated assets of $50 billion or more to submit annual capital plans to the Federal Reserve for review.1 Under the rule, these capital plans must include detailed descriptions of the following: the BHC's internal processes for assessing capital adequacy; the policies governing capital actions such as common stock issuance, dividends, and share repurchases; and all planned capital actions over a nine-quarter planning horizon. Further, each BHC must also report to the Federal Reserve the results of stress tests under a number of scenarios run by the BHC (company-run stress tests) that assess the sources and uses of capital under baseline and stressed economic and financial conditions.
The Federal Reserve projected post-stress capital ratios for each BHC based on the BHC's planned capital actions over the nine-quarter planning horizon.2 The projection also incorporated the stress loss and revenue estimates from the Dodd-Frank Wall Street Reform and Consumer Protection Act stress test (DFAST).(For a comparison of DFAST and CCAR, see box 2). With this information, the Federal Reserve conducted an analysis of the firms' capital plans and either objected or provided a non-objection to each of the 18 firms' capital plans.
Box 1. Overview of Trends in Capital Levels for Large U.S. BHCs
The 18 BHCs that are part of this year's CCAR hold more than 70 percent of the total assets of all domestic BHCs. Improvements in the amount and quality of capital held by these institutions have been critical to the stabilization of the broader financial system. One of the initial driving forces behind these improvements was the 2009 Supervisory Capital Assessment Program (SCAP), which was led by the Federal Reserve. Building on the SCAP, the the Federal Reserve conducted the first annual CCAR in 2011 and in the same year issued the capital plan rule. These programs have reinforced other factors such as the strengthening of international capital standards under Basel III and general improvements in profitability due to better economic conditions.
As shown in figure A, the weighted average tier 1 common equity ratio of the 18 CCAR BHCs has more than doubled from 5.6 percent at the end of 2008 to 11.3 percent in the fourth quarter of 2012. That increase reflects a total gain of $393 billion in tier 1 common equity among these banks to $792 billion at the end of 2012.1 Part of this increase is attributable to a significant accretion of common equity through retained earnings. BHCs have also raised equity from external sources, including the equity raised in connection with the redemption of U.S. government investments under the Troubled Asset Relief Program and following the SCAP.
Note: Aggregate capital ratio for 18 participating BHCs, based on Y-9C filings. The tier 1 common ratio in the fourth quarter of 2008
includes the tier 1 common capital and risk-weighted assets for Ally Financial Inc. as of the first quarter of 2009, as Ally did not file
a Y-9C report with the Federal Reserve in the fourth quarter of 2008.
References
1. Calculations based on Y-9C filings. Ally Financial Inc. filed its first Y-9C report in the first quarter of 2009. These calculations and the figure use the first quarter of 2009 data for Ally Financial Inc. for the fourth quarter of 2008. Return to text
The Federal Reserve may object to a capital plan on quantitative or qualitative grounds, or, when appropriate, both.3 When the Federal Reserve objects to a BHC's capital plan, the BHC may not make any capital distribution unless the Federal Reserve indicates in writing that it does not object to the distribution.4
While the nine-quarter planning horizon contained in the 2013 capital plans extends through the end of 2014, the Federal Reserve's approval of BHCs' planned capital actions is carried out annually and applies only to the four quarters beginning in the second quarter of the current year and ending in the first quarter of the following year.5 The Federal Reserve evaluates planned capital actions for the remainder of the nine-quarter planning horizon to better understand each BHC's longer-term capital management strategy and to assess post-stress capital levels over the full planning horizon.6
In its quantitative assessment, the Federal Reserve evaluated each BHC's ability to make all planned capital actions in its CCAR capital plan and maintain post-stress capital ratios of greater than 5 percent tier 1 common capital and all required regulatory minimum levels based on the results of the BHCs' company-run stress tests and post-stress capital ratios estimated by the Federal Reserve (CCAR post-stress capital analysis).
In last year's CCAR, a BHC could resubmit a plan with a downward adjustment, but only after receiving a notice of objection to its capital plan. This year, the Federal Reserve provided BHCs with an opportunity to adjust planned capital distributions after receiving the Federal Reserve's preliminary CCAR post-stress capital analysis. The only kind of adjustment permitted under this new procedure was a reduction of the planned capital distributions that were submitted by the BHCs in their January 2013 capital plans. These adjusted capital actions, if any, were then incorporated into the Federal Reserve's projections to calculate the adjusted post-stress capital levels and ratios. For firms that submitted an adjusted capital distribution, the Federal Reserve is disclosing both the minimum projected capital ratios using the originally submitted planned capital actions and the adjusted planned capital actions.
Box 2. Dodd-Frank Act Supervisory Stress Tests and the CCAR Post-Stress Capital Analysis
While closely related, there are some important differences between the Dodd-Frank Act supervisory stress tests and the CCAR post-stress capital analysis. The projections of pre-tax net income from the Dodd-Frank Act supervisory stress tests are direct inputs to the CCAR post-stress capital analysis. The primary difference between the Dodd-Frank Act supervisory stress tests and the CCAR post-stress capital analysis is the capital action assumptions that are combined with these projections to estimate post-stress capital levels and ratios.
Capital Action Assumptions for the Dodd-Frank Act Supervisory Stress Tests
To project post-stress capital ratios for the Dodd-Frank Act supervisory stress tests, the Federal Reserve uses a standardized set of capital action assumptions that are specified in the Dodd-Frank Act stress test rules.1 Common stock dividend payments are assumed to continue at the same level as the previous year. Scheduled dividend, interest, or principal payments on any other capital instrument eligible for inclusion in the numerator of a regulatory capital ratio are assumed to be paid. The assumptions are that repurchases of common stock are zero. The capital action assumptions did not include issuance of new common stock, preferred stock, or other instrument that would be included in regulatory capital, except for common stock issuance associated with expensed employee compensation.2
Capital Actions for CCAR
In contrast, for the CCAR post-stress capital analysis, the Federal Reserve uses BHCs' planned capital actions, and assesses whether a BHC would be capable of meeting supervisory expectations for minimum capital ratios even if stressful conditions emerged and the BHC did not reduce planned capital distributions.
As a result, post-stress capital ratios projected for the Dodd-Frank Act supervisory stress tests should be expected to differ significantly from those for the CCAR post-stress capital analysis. For example, if a BHC includes a dividend cut in its planned capital actions, its post-stress capital ratios projected for the CCAR capital analysis could be higher than those projected for the Dodd-Frank Act supervisory stress tests. Conversely, if a BHC includes significant dividend increases, repurchases, or other actions that deplete capital in its planned capital actions, the post-stress capital ratios for CCAR could be lower.
References
1. In order to make the results of its supervisory stress test comparable to the company-run stress tests, the Federal Reserve uses the same capital action assumptions as those required for the company-run stress tests, outlined in the Dodd-Frank stress test rules. See 12 CFR 252.146(b)(2). Return to text
2. The Dodd-Frank Act stress test rule for covered companies assumes that future capital actions that are subject to future adjustment, market conditions, or other regulatory approvals will not be reflected in a company's projected regulatory capital for the purpose of the company-run stress tests because of the uncertainty of these actions. Accordingly, under the rule, a company must assume in the second through ninth quarters of the planning horizon no redemption or repurchase of any capital instrument eligible for inclusion in the numerator of a regulatory capital ratio. See 12 CFR 252.146(b)(2)(iii). The Federal Reserve clarified in subsequent guidance that, for similar reasons, a company should assume that it will not issue any new common stock, preferred stock, or other instrument that would be included in regulatory capital in the second through ninth quarters of the planning horizon, except for common stock issuances associated with expensed employee compensation. Return to text
In the qualitative assessment in CCAR, the Federal Reserve evaluated the extent to which the analysis underlying each BHC's capital plan captured and appropriately addressed potential risks stemming from all activities across the consolidated institution under baseline and stressed operating conditions; the reasonableness of the assumptions and analysis underlying the capital plan; the robustness of the BHC's capital adequacy process, including supporting risk-measurement and -management practices; and corporate governance and controls in the capital planning process, including the BHC's capital policies as approved by its board of directors.
Table 1 summarizes the Federal Reserve's decisions on the CCAR 2013 capital plans.
| Non-objection to capital plan | Conditional non-objection to capital plan | Objection to capital plan |
|---|---|---|
| American Express Company | The Goldman Sachs Group, Inc. | Ally Financial Inc. |
| Bank of America Corporation | JPMorgan Chase & Co. | BB&T Corporation |
| The Bank of New York Mellon Corporation | ||
| Capital One Financial Corporation | ||
| Citigroup Inc. | ||
| Fifth Third Bancorp | ||
| KeyCorp | ||
| Morgan Stanley | ||
| The PNC Financial Services Group, Inc. | ||
| Regions Financial Corporation | ||
| State Street Corporation | ||
| SunTrust Banks, Inc. | ||
| U.S. Bancorp | ||
| Wells Fargo & Co. |
The Federal Reserve did not object to the capital plan and planned capital distributions for BHCs listed in the "Non-objection to capital plan" column or the "Conditional non-objection to capital plan" column.
The Federal Reserve objected to the capital plan, including in one or more cases some or all of the planned capital distributions, of each BHC listed in the "Objection to capital plan" column. Each firm listed either had deficiencies in its capital planning process so significant as to undermine the quantitative results of the stress tests for that firm, the overall reliability of the firm's capital planning process, or both. Ally Financial Inc.'s capital plan received an objection from the Federal Reserve, both on quantitative and qualitative grounds.7 BB&T's capital plan was objected to based on a qualitative assessment conducted by the Federal Reserve. These BHCs are not permitted to implement their requested plans for capital distributions and are required to resubmit their capital plans to the Federal Reserve following remediation of these deficiencies, consistent with the requirements in the capital plan rule.8
The Federal Reserve did not object to the capital plans of The Goldman Sachs Group, Inc. and JPMorgan Chase & Co., which are both listed in the "Conditional non-objection to capital plan" column. However, each of these BHCs exhibited weaknesses in its capital plan or capital planning process that were significant enough to require immediate attention, even though those weaknesses do not undermine the quantitative results of the stress tests for that firm or the overall reliability of the firm's capital planning process. As a condition of the Federal Reserve's non-objection to their capital plans, each of these BHCs is required to remediate immediately the weaknesses identified in its capital plan and capital planning process and to resubmit a capital plan to the Federal Reserve by the end of the third quarter of 2013. Failure to remediate these weaknesses adequately by the time of resubmission would be grounds for objecting to the capital plans and planned capital distributions.
Table 2 contains minimum post-stress tier 1 common ratios for each of the 18 BHCs under the severely adverse scenario. The middle column of the table incorporates the original planned capital distributions included in the capital plans submitted by the BHCs in January 2013. The ratios reported in the right-hand column of the table incorporate any adjusted capital distributions submitted by a BHC after receiving the Federal Reserve's preliminary CCAR post-stress capital analysis. Depending on these adjustments, the minimum post-stress ratio with the original planned capital distributions could occur in a different quarter of the planning horizon than the minimum with the adjusted capital distributions. This means that it is difficult to assess the size of any adjustment simply by comparing the minimums based on the original and adjusted capital actions.
| Bank holding company | Stressed ratios with original planned capital actions | Stressed ratios with adjusted planned capital actions |
|---|---|---|
| Ally Financial Inc.1 | 1.78 | 1.52 |
| American Express Company | 4.97 | 6.42 |
| Bank of America Corporation | 6.04 | |
| The Bank of New York Mellon Corporation | 13.21 | |
| BB&T Corporation 2 | 7.76 | |
| Capital One Financial Corporation | 6.69 | |
| Citigroup Inc. | 8.22 | |
| Fifth Third Bancorp | 7.50 | |
| The Goldman Sachs Group, Inc. | 5.26 | |
| JPMorgan Chase & Co. | 5.56 | |
| KeyCorp | 6.75 | |
| Morgan Stanley | 5.62 | |
| The PNC Financial Services Group, Inc. | 8.55 | |
| Regions Financial Corporation | 7.00 | |
| State Street Corporation | 9.65 | |
| SunTrust Banks, Inc. | 6.91 | |
| U.S. Bancorp | 6.61 | |
| Wells Fargo & Co. | 5.94 |
Note: The capital ratios are calculated using original and adjusted planned capital actions from 2013 annual capital plans. The minimum stressed ratios (%) are the lowest quarterly ratios from Q4 2012 to Q4 2014 in the supervisory severely adverse scenario. The capital plan rule stipulates that the BHCs must demonstrate their ability to maintain tier 1 common ratios above 5 percent.
1. The post-stress capital ratios presented in the table are based on an assumption that Ally remains subject to contingent liabilities associated with Residential Capital, LLC ("ResCap"). On May 14, 2012, ResCap and certain of its subsidiaries filed for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York. As of March 6, 2013, the outcome of the ResCap bankruptcy remained pending. Return to table
2. The actual and post-stress capital ratios presented in the table are based on information that BB&T provided to the Federal Reserve in regulatory reports on or before February 6, 2013. The information that BB&T provided to the Federal Reserve includes information regarding BB&T's risk-weighted assets. On March 4, 2013, BB&T disclosed publicly that it had reevaluated its process related to calculating risk-weighted assets and determined that certain adjustments, primarily related to the presentation of certain unfunded lending commitments, were required in order to conform to regulatory guidance. These adjustments resulted in an increase to risk-weighted assets and a decrease in BB&T's risk-based capital ratios and are not reflected in this table. Return to table
Source: Federal Reserve estimates in the severely adverse scenario.
Return to textAs table 3 shows, two BHCs--Ally Financial Inc. and American Express Company--had at least one minimum post-stress capital ratio fall below regulatory minimum levels based on the original planned capital actions. Both BHCs submitted adjusted capital actions.
The projections show declines in capital ratios from the beginning of the CCAR exercise in the third quarter of 2012 for all the BHCs under the hypothetical severely adverse scenario. Table 3 reports minimum capital ratios based on both the original and adjusted planned capital actions. The table shows that in the aggregate, the minimum level of each of the four capital ratios is significantly below the third-quarter 2012 starting value, with declines ranging between 2.7 and 5.0 percentage points for the ratios based on the original planned capital actions. There is considerable variation across BHCs in the extent of the decline; for example, the change in the tier 1 common ratio varies between one-tenth of 1 percentage point and 8.3 percentage points for the ratios based on adjusted capital actions for those BHCs making adjustments and original planned capital actions for those BHCs that did not make adjustments.
| Bank holding company | Tier 1 common ratio (%) | Tier 1 capital ratio (%) | Total risk-based capital ratio (%) | Tier 1 leverage ratio (%) | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Actual Q3 2012 | Minimum capital ratio | Actual Q3 2012 | Minimum capital ratio | Actual Q3 2012 | Minimum capital ratio | Actual Q3 2012 | Minimum capital ratio | |||||
| Original planned capital actions | Adjusted planned capital actions | Original planned capital actions | Adjusted planned capital actions | Original planned capital actions | Adjusted planned capital actions | Original planned capital actions | Adjusted planned capital actions | |||||
| Ally Financial Inc.1 | 7.33 | 1.78 | 1.52 | 13.64 | 4.07 | 11.02 | 14.63 | 5.96 | 12.59 | 11.29 | 3.50 | 9.42 |
| American Express Company | 12.73 | 4.97 | 6.42 | 12.75 | 4.98 | 6.43 | 14.70 | 7.06 | 8.54 | 10.71 | 3.99 | 5.15 |
| Bank of America Corporation | 11.41 | 6.04 | 13.64 | 7.20 | 17.16 | 10.24 | 7.84 | 4.62 | ||||
| The Bank of New York Mellon Corporation | 13.28 | 13.21 | 15.29 | 14.66 | 16.86 | 15.31 | 5.63 | 5.03 | ||||
| BB&T Corporation 2 | 9.52 | 7.76 | 10.86 | 9.52 | 14.01 | 11.75 | 7.90 | 7.06 | ||||
| Capital One Financial Corporation | 10.69 | 6.69 | 12.74 | 7.18 | 14.98 | 9.48 | 9.88 | 5.23 | ||||
| Citigroup Inc. | 12.73 | 8.22 | 13.92 | 9.35 | 17.12 | 12.35 | 7.39 | 5.38 | ||||
| Fifth Third Bancorp | 9.67 | 7.50 | 10.85 | 8.55 | 14.76 | 12.26 | 10.09 | 8.04 | ||||
| The Goldman Sachs Group, Inc. | 13.12 | 5.26 | 14.98 | 7.20 | 18.07 | 9.96 | 7.17 | 3.85 | ||||
| JPMorgan Chase & Co. | 10.42 | 5.56 | 11.93 | 6.80 | 14.69 | 9.49 | 7.08 | 4.10 | ||||
| KeyCorp | 11.30 | 6.75 | 12.10 | 7.37 | 15.17 | 9.98 | 11.37 | 6.94 | ||||
| Morgan Stanley | 13.89 | 5.62 | 16.95 | 7.44 | 16.98 | 8.59 | 7.18 | 4.53 | ||||
| The PNC Financial Services Group, Inc. | 9.48 | 8.55 | 11.68 | 10.82 | 14.49 | 14.18 | 10.38 | 8.63 | ||||
| Regions Financial Corporation | 10.46 | 7.00 | 11.48 | 7.54 | 14.95 | 10.52 | 9.10 | 6.00 | ||||
| State Street Corporation | 17.78 | 9.65 | 19.78 | 11.22 | 21.32 | 13.86 | 7.60 | 5.48 | ||||
| SunTrust Banks, Inc. | 9.82 | 6.91 | 10.57 | 8.61 | 12.95 | 10.75 | 8.49 | 6.86 | ||||
| U.S. Bancorp | 8.97 | 6.61 | 10.91 | 8.54 | 13.32 | 10.54 | 9.17 | 7.20 | ||||
| Wells Fargo & Company | 9.92 | 5.94 | 11.50 | 7.73 | 14.51 | 10.72 | 9.40 | 6.18 | ||||
| 18 participating bank holding companies | 11.14 | 6.56 | 12.94 | 8.06 | 15.74 | 10.76 | 7.96 | 5.23 | ||||
Note: The capital ratios are calculated using original and adjusted planned capital actions from 2013 annual capital plans. These projections represent hypothetical estimates that involve an economic outcome that is more adverse than expected. These estimates are not forecasts of capital ratios. The center column shows the minimum ratio assuming the capital actions originally submitted by the BHC in its January 2013 annual capital plan. The right column shows minimum ratios incorporating any adjustments to capital distributions made by the BHC after reviewing the Federal Reserve's stress test projections. The two minimum capital ratios presented are for the period Q4 2012 to Q4 2014 and do not necessarily occur in the same quarter.
The minimum ratios for BHCs are 4 percent for the tier 1 capital ratio, 8 percent for the total capital ratio, and 3 or 4 percent for the tier 1 leverage ratio (3 percent only for a BHC with a composite supervisory rating of "1" or that is subject to the Federal Reserve Board's market-risk rule [12 CFR part 225, appendix E]). Ally Financial Inc., American Express Company, and Capital One Financial Corporation are not subject to the market risk rule (12 CFR part 225, appendix E). All other BHCs that participated in CCAR 2013 are subject to the market risk rule, and accordingly, their minimum leverage ratio is 3 percent. The capital plan rule stipulates that a BHC must demonstrate an ability to maintain a tier 1 common ratio above 5 percent in its capital plan.
1. The post-stress capital ratios presented in the table are based on an assumption that Ally remains subject to contingent liabilities associated with Residential Capital, LLC ("ResCap"). On May 14, 2012, ResCap and certain of its subsidiaries filed for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York. As of March 6, 2013, the outcome of the ResCap bankruptcy remained pending. Return to table
2. The actual and post-stress capital ratios presented in the table are based on information that BB&T provided to the Federal Reserve in regulatory reports on or before February 6, 2013. The information that BB&T provided to the Federal Reserve includes information regarding BB&T's risk-weighted assets. On March 4, 2013, BB&T disclosed publicly that it had reevaluated its process related to calculating risk-weighted assets and determined that certain adjustments, primarily related to the presentation of certain unfunded lending commitments, were required in order to conform to regulatory guidance. These adjustments resulted in an increase to risk-weighted assets and a decrease in BB&T's risk-based capital ratios and are not reflected in this table. Return to table
Source: Federal Reserve estimates in the severely adverse scenario.
Return to textReferences
1. The capital plan rule is codified at 12 CFR 225.8. Asset size is measured over the previous four calendar quarters as reported on the FR Y-9C regulatory report. Return to text
2. The nine-quarter planning horizon spans from fourth quarter 2012 to fourth quarter 2014. Return to text
3. See 12 CFR 225.8(e)(2)(ii). Return to text
4. See 12 CFR 225.8(e)(2)(iv). Return to text
5. For CCAR 2013, the nine-quarter planning horizon covered in the capital plans begins in the fourth quarter of 2012 and ends in the fourth quarter of 2014. If the Federal Reserve does not object to a BHC's capital plan, the BHC may make the planned capital distributions for the four-quarter period beginning in the second quarter of 2013 and ending in the first quarter of 2014. Capital distributions in the fourth quarter of 2012 and the first quarter of 2013 were addressed in capital plans submitted in connection with CCAR 2012, and capital distributions for the four-quarter period beginning in the second quarter of 2014 and ending in the first quarter of 2015 will be addressed in the BHCs' 2014 capital plans. Return to text
6. See Board of Governors of the Federal Reserve System (2012), "Comprehensive Capital Analysis and Review 2012: Methodology for Stress Scenario Projections," report (Washington: Board of Governors, March 12), www.federalreserve.gov/newsevents/press/bcreg/bcreg20120312a1.pdf. Return to text
7. 12 CFR 225.8(e)(2)(ii). Return to text
8. See 12 CFR 225.8(d)(4). Return to text
