The Federal Reserve promotes a safe, sound, and stable banking and financial system that supports the growth and stability of the U.S. economy through its supervision of bank holding companies (BHCs), U.S. intermediate holding companies (IHCs), savings and loan holding companies, state member banks, and nonbank financial institutions that the Financial Stability Oversight Council has determined shall be supervised by the Board of Governors of the Federal Reserve System (Board).1
The Federal Reserve has established frameworks and programs for the supervision of the largest financial institutions to achieve its supervisory objectives, incorporating the lessons learned from the financial crisis and in the period since. As part of these supervisory frameworks and programs, the Federal Reserve annually assesses whether financial firms with $50 billion or more in total consolidated assets are sufficiently capitalized to absorb losses during stressful conditions, while meeting obligations to creditors and counterparties and continuing to be able to lend to households and businesses. The Federal Reserve's expectations for capital planning practices are tailored to the size, scope of operations, activities, and systemic importance of a particular firm. In particular, the Federal Reserve has significantly heightened expectations for BHCs and IHCs supervised by the Large Institution Supervision Coordinating Committee (LISCC) firms and "large and complex firms."2
This annual assessment includes two related programs:
- The Comprehensive Capital Analysis and Review (CCAR) consists of a quantitative assessment for all BHCs with $50 billion or more in total consolidated assets and a qualitative assessment for BHCs that are LISCC or large and complex firms. The quantitative assessment evaluates a firm's capital adequacy and planned capital distributions, such as any dividend payments and common stock repurchases. The Federal Reserve assesses whether firms have sufficient capital to continue operating and lending to creditworthy households and businesses throughout times of economic and financial market stress, even after making all planned capital distributions. CCAR also includes a qualitative assessment of capital planning practices at the largest and most complex firms. As part of the qualitative assessment, the Federal Reserve evaluates the reliability of each firm's analyses and other processes for capital planning, focusing on the areas that are most critical to sound capital planning--namely, how a firm identifies, measures, and determines capital needs for its material risks--and a firm's controls and governance around those practices. The Federal Reserve recently tailored its rules to remove "large and noncomplex firms" from the qualitative assessment process.3 At the conclusion of the process, the Federal Reserve either does not object or objects to a firm's capital plan. If the Federal Reserve objects to a firm's capital plan, the firm may only make capital distributions that the Federal Reserve has not objected to in writing.
- Dodd-Frank Act supervisory stress testing is a forward-looking quantitative evaluation of the impact of stressful economic and financial market conditions on BHCs' capital. The supervisory stress test serves to inform the Federal Reserve, BHCs, and the general public of how institutions' capital ratios might change under a hypothetical set of stressful economic conditions developed by the Federal Reserve.4 The supervisory stress test results, after incorporating firms' planned capital actions, are also used for the quantitative assessment in CCAR.
1. Information on the Federal Reserve's regulation and supervision function, including more detail on stress testing and capital planning assessment, is available on the Federal Reserve's website at www.federalreserve.gov/supervisionreg.htm. Return to text
2. "Large and complex firms" are BHCs or U.S. IHCs that (1) have average total consolidated assets of $250 billion or more, or (2) have average total nonbank assets of $75 billion or more, and (3) are not LISCC firms. Return to text
3. "Large and noncomplex firms" are BHCs or U.S. IHCs that (1) have average total consolidated assets of $50 billion or more, but less than $250 billion, (2) have average total nonbank assets of less than $75 billion, and (3) are not U.S. global systemically important banks. Return to text
4. In addition to an annual supervisory stress test conducted by the Federal Reserve, each participating institution is required to conduct annual company-run stress tests under the same supervisory scenarios and conduct a mid-cycle stress test under company-developed scenarios. Return to text