Introduction

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 assess 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.

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These instructions provide information regarding requirements and expectations for the stress testing and capital planning cycle that began on January 1, 2016, and the related CCAR exercise (CCAR 2016). Similar to the instructions in previous years, the instructions for CCAR 2016 provide information regarding the

• logistics for a BHC's capital plan submissions;
• expectations regarding the mandatory elements of a capital plan;
• qualitative assessment of a BHC's capital plan;
• quantitative assessment of a BHC's post-stress capital adequacy;
• response to capital plans and planned capital actions;
• limited adjustments a BHC may make to its planned capital distributions; and
• planned supervisory disclosures at the end of the CCAR exercise.

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Differences from Previous Exercises in CCAR 2016 Instructions

The CCAR 2016 instructions differ in two aspects from previous instructions. First, these instructions provide additional details about how BHCs should implement the most recent technical amendments to the stress test and capital plan rules.¹ In addition, these instructions do not contain details on supervisory expectations for BHCs' capital planning practices, but rather reference the Federal Reserve's recently published supervisory guidance for capital planning ² (Supervision and Regulation (SR) letters 15-18 and 15-19).

• Incorporation of amendments to the capital plan and stress test rules: Starting in CCAR 2016, BHCs must implement the most recent technical amendments to the stress test and capital plan rules. The amendments include

  • the removal of the tier 1 common ratio;
  • indefinite delay of the advanced approaches risk-weighted asset calculations;
  • a one-year delay for incorporating into CCAR the supplementary leverage ratio (see "Estimates of Projected Revenues, Losses, Reserves, and Pro Forma Capital Levels");
  • modifications to required capital action assumptions in the stress test rules (see "Capital Action Assumptions");
  • a description of the treatment of certain calculations and regulatory capital deductions required under 12 CFR 248.12(d) (the Volcker rule) (see "Estimates of Projected Revenues, Losses, Reserves, and Pro Forma Capital Levels"); and
  • clarifications regarding the intersection of certain aspects of the regulatory capital framework and the stress test and capital plan rules in CCAR 2016.³
• Supervisory expectations: BHCs should refer to the recently published SR letters that detail the supervisory expectations for large BHCs' capital planning processes.⁴ SR letter 15-18, "Federal Reserve Supervisory Assessment of Capital Planning and Positions for LISCC Firms and Large and Complex Firms," provides supervisory expectations for capital planning for firms subject to the Federal Reserve's Large Institution Supervision Coordination Committee (LISCC) framework and other Large and Complex Firms, and SR letter 15-19, "Federal Reserve Supervisory Assessment of Capital Planning and Positions for Large and Noncomplex Firms," details the supervisory expectations for capital planning for Large and Noncomplex Firms.⁵ These SR letters consolidate capital planning expectations that have been previously communicated to firms, including through past years' CCAR instructions, and clarify differences in expectations based on firm size and complexity.

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Overview of CCAR Process

The Board of Governors of the Federal Reserve System's (Board's) capital plan rule requires BHCs with consolidated assets of $50 billion or more to submit annual capital plans to the Board and the appropriate Reserve Bank.⁶ Under the rule, a BHC's capital plan must include detailed descriptions of the BHC's internal processes for assessing capital adequacy; the board of directors' approved policies governing capital actions; and the BHC's planned capital actions over a nine-quarter planning horizon. Further, a BHC must report to the Federal Reserve the results of stress tests conducted by the BHC under scenarios provided by the Federal Reserve and under a stress scenario designed by the BHC (BHC stress scenario). These stress tests assess the sources and uses of capital under baseline and stressed economic and financial market conditions.

Before a BHC submits its capital plan to the Federal Reserve, the capital plan must be approved by the BHC's board of directors, or a committee thereof.⁷ For CCAR 2016, capital plans should be submitted to the Federal Reserve no later than April 5, 2016.⁸

Under the capital plan rule, the Federal Reserve assesses the overall financial condition, risk profile, and capital adequacy of a BHC on a forward-looking basis and also assesses the strength of the BHC's capital planning process, including its capital policies (qualitative assessment).⁹ In particular, the Federal Reserve seeks to ensure that large BHCs have sound processes for managing their capital resources, and that those processes are supported by comprehensive and effective firm-wide risk-identification, risk-measurement, and risk-management practices. The Federal Reserve expects that a BHC's capital planning will adequately account for the potential for economic and financial stressful environments and will be supported by strong internal control practices and effective oversight by its boards of directors and senior management.

The Federal Reserve's qualitative assessment of a BHC's capital plan is informed by a review of the materials each BHC provides in support of its annual capital plan submission. The qualitative assessment considers key aspects of a BHC's capital planning process, ranging from the stress testing methods used to inform the forward-looking assessment of the BHC's capital adequacy to risk identification, internal controls, and governance supporting the process. In addition, the qualitative assessment incorporates supervisory evaluations of related issues in BHCs' risk identification and management practices, internal control processes, and overall corporate governance that may be identified through supervisory assessments carried out throughout the year.

The Federal Reserve's quantitative assessment of a BHC's capital plan is based on the supervisory and company-run stress tests that are conducted, in part, under the Board's rules implementing sections 165(i)(1) and (2) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act stress test rules). (See "Discussion of Stress Tests Conducted by BHCs" and "Supervisory Post-Stress Capital Analysis".) The quantitative assessment of a BHC's capital plan includes a supervisory assessment of the BHC's ability to maintain capital levels above each minimum regulatory capital ratio, after making all capital actions included in its capital plans, under baseline and stressful conditions throughout the nine-quarter planning horizon. See table 1 for a list of the ratios that are applicable to all BHCs participating in CCAR 2016 over the planning horizon.

Both the quantitative and qualitative assessments are key inputs to the decision to object, or not object, to a BHC's capital plan. The decisions for BHCs participating in CCAR 2016, including the reasons for any objections to a BHC's capital plans, will be published on or before June 30, 2016. In addition, the Board will separately publish the results of its supervisory stress test under both the supervisory severely adverse and adverse scenarios.

Table 1. Minimum post-stress regulatory ratios
for CCAR 2016
Percent

Regulatory ratio	Minimum ratio
Common equity tier 1 capital ratio	4.5
Tier 1 risk-based capital ratio	6.0
Total risk-based capital ratio	8.0
Tier 1 leverage ratio	4.0

Note: All regulatory capital ratios are calculated using the definitions of capital, standardized risk-weighted assets, and total assets (for the tier 1 leverage ratio) that are in effect during a particular quarter of the planning horizon. The advanced approaches are not used for purposes of these projections. See 12 CFR 225.8(c)(3) and 12 CFR 225.8(d)(8).

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Correspondence Related to CCAR

All questions from BHCs and communications from the Federal Reserve concerning CCAR are handled through the secure CCAR Communications mailbox. Prior to and during the CCAR 2016 cycle, BHCs will receive program updates via e-mail from the CCAR Communications mailbox. These updates include notifications about CCAR industry conference calls hosted by the Federal Reserve and responses to frequently asked questions (FAQs) submitted by participating BHCs about the CCAR process and instructions.

The CCAR Communications mailbox serves as a BHC's primary point of contact for specific questions about the capital plan and stress test rule requirements. If a BHC seeks clarifications on elements of CCAR or the Dodd-Frank Act stress test (DFAST) program, the BHC should submit its questions to the mailbox. All questions and responses, other than BHC-specific questions, will be made available to all CCAR BHCs through FAQ documents that will be distributed to BHCs on a regular basis. BHC-specific questions will receive a direct response. If needed, meetings may be scheduled to discuss submitted questions in more detail; however, only those responses that a BHC receives through the secure CCAR Communications mailbox will be considered official responses from the Federal Reserve. A BHC should properly code any submitted question, to facilitate a timely response.

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References

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