Revised Capital Framework

On July 2, 2013, the Board approved a revised capital framework that implements the Basel III regulatory capital reforms and certain changes required by the Dodd-Frank Act (revised capital framework).³⁴ The revised capital framework affects the calculation of the regulatory capital ratios in the Dodd-Frank Act stress test because in the supervisory stress test each BHC's regulatory capital ratios for each projection quarter of the planning horizon are calculated in accordance with the regulatory capital requirements that will be in effect during that quarter. ³⁵ The remainder of this section describes the changes to the capital ratios associated with the phase-in of the revised capital framework.

As a result of the phase-in of the revised capital framework, the definition of regulatory capital (the numerators of the capital ratios) and the calculation of RWAs (the denominator of some of the regulatory capital ratios) vary over the nine-quarter stress test horizon. In addition, a new regulatory capital ratio--the common equity tier 1 ratio--was introduced during the course of the nine-quarter planning horizon.

Table 1 shows the applicability of the common equity tier 1 ratio and the rules used to calculate the numerators and denominators of the capital ratios for each BHC. For the first quarter of the planning horizon--the fourth quarter of 2013--three regulatory capital ratios are calculated for all BHCs: the tier 1 capital ratio, the total capital ratio, and the tier 1 leverage ratio.³⁶ The tier 1 and total capital ratios are defined as tier 1 capital and total capital, respectively, divided by RWAs, while the tier 1 leverage ratio equals tier 1 capital divided by average total assets.

For Q4 2013, tier 1 and total capital are calculated based on the regulatory capital rules in place before adoption of the revised capital framework (Basel I-based capital rules), and RWAs are calculated using the "general risk-based capital approach" in those rules.

Beginning in the second quarter of the stress test horizon (the first quarter of 2014), the DFAST capital ratios for advanced approaches BHCs, other than the tier 1 common ratio, reflect the definitions of regulatory capital under the revised capital framework. For other BHCs, the revised definition of capital does not occur until the sixth quarter of the planning horizon (the first quarter of 2015). The new definitions of capital include changes to certain limitations on the instruments that can be included in regulatory capital and the items that must be deducted, such as intangible assets like goodwill.

The revised capital framework also introduces a new regulatory capital ratio beginning in 2014--the common equity tier 1 ratio.³⁷ This ratio equals common equity tier 1 capital divided by RWAs, where common equity tier 1 equals the common stock instruments and related surplus, retained earnings, AOCI for advanced approaches BHCs, and limited amounts of common equity tier 1 minority interest, minus applicable regulatory adjustments and deductions. This ratio was calculated for advanced approaches BHCs starting in the second quarter of the stress test horizon (Q1 2014), and for all other BHCs participating in the Dodd-Frank Act stress tests starting in the last year of the stress test horizon (2015).

Starting in 2015, the revised capital framework introduces a new standardized approach for risk weighting assets, which will replace the calculation of risk weights using the general risk-based capital approach. For this stress test cycle, the denominator of each BHC's capital ratios, other than the tier 1 common ratio, was calculated using the general approach for the first five quarters of the planning horizon (for the fourth quarter of 2013 through the last quarter of 2014) and was calculated using the standardized approach for the last four quarters of the planning horizon (for all quarters in 2015). By comparison, the tier 1 common capital ratio is calculated using the general approach in place as of October 1, 2013, for all nine quarters of the planning horizon.

The results for DFAST 2014 continue to include the tier 1 common capital ratio.³⁸ The tier 1 common capital ratio equals the common equity portion of tier 1 capital divided by RWAs. The tier 1 common ratio differs from the common equity tier 1 ratio because (1) for advanced approaches companies, most elements of AOCI flow through to common equity tier 1, but not to tier 1 common capital; (2) more assets are subject to deduction from common equity tier 1 capital than from tier 1 common capital, including investments in unconsolidated financial institutions and all deferred tax assets that arise from operating losses and tax credit carry forwards; and, (3) beginning in 2015, the denominators of the two ratios will use different approaches for calculating RWAs. Preserving the tier 1 common ratio maintains consistency with previous stress testing cycles during the phase-in of the new common equity tier 1 capital ratio.

Table 1. Applicable capital ratios and calculations in the 2014 Dodd-Frank Act stress tests

Capital ratio	Aspect of ratio	Q4 2013	2014	2015
Advanced approaches BHCs
Common equity tier 1 ratio	Capital in numerator	n.a.	Revised capital framework	Revised capital framework
Denominator	n.a.	General approach RWAs	Standardized approach RWAs
Tier 1 ratio	Capital in numerator	Basel I-based capital	Revised capital framework	Revised capital framework
Denominator	General approach RWAs	General approach RWAs	Standardized approach RWAs
Total capital ratio	Capital in numerator	Basel I-based capital	Revised capital framework	Revised capital framework
Denominator	General approach RWAs	General approach RWAs	Standardized approach RWAs
Tier 1 leverage ratio	Capital in numerator	Basel I-based capital	Revised capital framework	Revised capital framework
Denominator	Average assets	Average assets	Average assets
Tier 1 common ratio	Capital in numerator	Basel I-based capital	Basel I-based capital	Basel I-based capital
Denominator	General approach RWAs	General approach RWAs	General approach RWAs
Other BHCs
Common equity tier 1 ratio	Capital in numerator	n.a.	n.a.	Revised capital framework
Denominator	n.a.	n.a.	Standardized approach RWAs
Tier 1 ratio	Capital in numerator	Basel I-based capital	Basel I-based capital	Revised capital framework
Denominator	General approach RWAs	General approach RWAs	Standardized Approach RWAs
Total capital ratio	Capital in numerator	Basel I-based capital	Basel I-based capital	Revised capital framework
Denominator	General approach RWAs	General approach RWAs	Standardized approach RWAs
Tier 1 leverage ratio	Capital in numerator	Basel I-based capital	Basel I-based capital	Revised capital framework
Denominator	Average assets	Average assets	Average assets
Tier 1 common ratio	Capital in numerator	Basel I-based capital	Basel I-based capital	Basel I-based capital
Denominator	General approach RWA	General approach RWA	General approach RWA

"Basel I-based capital" indicates that regulatory capital is calculated under the rules in place before the implementation of the revised capital framework (see 12 CFR part 225, appendix A). "Revised capital framework" indicates that regulatory capital is calculated under the revised capital framework. "General Approach RWAs" indicates that risk-weighted assets are calculated using the approach under the general risk-based capital rules (see 12 CFR part 225, appendix A) while "Standardized Approach RWAs" indicates that risk-weighted assets are calculated using the standardized approach under the revised capital framework. The "n.a." indicates that the capital ratio was not calculated for that time period. For purposes of DFAST 2014, an advanced approaches BHC includes any BHC that has consolidated assets greater than or equal to $250 billion or total consolidated on-balance-sheet foreign exposure of at least $10 billion as of December 31, 2013.

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