Comprehensive Capital Analysis and Review 2015: Summary Instructions and Guidance
Print- Supervisory Expectations for a Capital Adequacy Process
- Federal Reserve Assessment of BHC Capital Plans
- Appendix A: Common Themes from CCAR 2014
Federal Reserve Assessment of BHC Capital Plans
To support its assessment of the capital plans, the Federal Reserve will review the supporting analyses in a BHC's capital plan, including the BHC's own stress test results, and will generate supervisory estimates of losses; revenues; loan-loss reserves; balance sheet components and RWAs; and post-stress capital ratios using internally developed supervisory models and assumptions wherever possible.39
The Federal Reserve has differing expectations for BHCs of different sizes, scope of operations, activities, and systemic importance in various aspects of capital planning. In particular, the Federal Reserve has significantly heightened expectations for BHCs that are subject to the Federal Reserve's Large Institution Supervision Coordinating Committee (LISCC) framework.40 In assessing a BHC's capital planning, capital positions, and overall capital adequacy, the Federal Reserve will have heightened expectations for the LISCC BHCs. These BHCs are expected to have the most sophisticated, comprehensive, and robust capital adequacy processes.
Qualitative Assessments
Qualitative assessments are a critical component of the CCAR review. Even if the supervisory stress test for a given BHC results in post-stress capital ratios above the minimum requirements, the Federal Reserve could nonetheless object to that BHC's capital plan for other reasons. These reasons include, but are not limited to, the following:
- There are material unresolved supervisory issues.
- The assumptions and analyses underlying the BHC's capital plan are not reasonable or appropriate.
- The BHC's methodologies for reviewing the robustness of its capital adequacy process are not reasonable or appropriate.
- The CCAR assessment results in a determination that a BHC's capital adequacy process or proposed capital distributions would otherwise constitute an unsafe or unsound practice or would violate any law, regulation, Board order, directive, or any condition imposed by, or written agreement with, the Board.41
As noted above, under the capital plan rule, the Federal Reserve may object to a BHC's capital plan if the assumptions and analyses underlying its capital plan, or the BHC's methodologies for reviewing the robustness of its capital adequacy process, are not reasonable or appropriate. The Federal Reserve assesses the strength of the risk-measurement and risk-management practices supporting the capital adequacy process and the governance and controls around these practices. The Federal Reserve's qualitative assessment places particular emphasis on material risk identification; the BHC stress scenario; the translation of the BHC stress scenario into projected losses, revenues, and post-stress capital ratios; and the controls and governance around the capital adequacy process.
If the Federal Reserve identifies substantial weaknesses in a BHC's capital adequacy process, that finding on its own could justify an objection to a BHC's capital plan. However, a non-objection to a BHC's capital plan does not necessarily mean that a BHC is considered to have fully satisfactory practices supporting every element of its capital adequacy process.
Quantitative Assessments
In this Section:
The various types of quantitative assessments that the Federal Reserve expects to consider are described in figure 2. The Federal Reserve will evaluate the BHC's post-stress capital ratios based on the combination of stress performance measures (e.g., revenues, losses, and reserves from the supervisory adverse and severely adverse scenarios) and the BHC's planned capital actions (e.g., planned dividends, issuances, and repurchases as provided in the BHC baseline scenario) against each minimum regulatory capital ratio and a 5 percent tier 1 common ratio in each quarter of the planning horizon.
Note: Each box indicates a distinct scenario that will be submitted by each BHC. Planned capital actions are estimated by each BHC using the BHC baseline scenario, and the alternative capital actions are estimated under the BHC's stress scenario in accordance with the BHC's internal capital policies.
* If a BHC determines the supervisory baseline scenario to be appropriate for its own BHC baseline, the BHC may submit identical FR Y-14A Summary schedules with the exception of the capital worksheets noted above. All BHCs must complete two capital worksheets for the supervisory baseline and supervisory severely adverse scenario.
Supervisory Post-Stress Capital Analysis
In conducting its supervisory stress tests of BHCs under the Dodd-Frank Act stress test rules, the Federal Reserve will use the same supervisory scenarios and assumptions as the BHCs are required to use under the Dodd-Frank Act stress test rules to project revenues, losses, net income, and post-stress capital ratios.42 In addition, the Federal Reserve will independently project BHCs' balance sheet and RWAs over the nine-quarter planning horizon, using the same supervisory macroeconomic scenarios. Supervisory models and assumptions will be applied in a consistent manner across all BHCs.
In connection with the annual CCAR exercise, the Federal Reserve will use the data and information provided in the FR Y-14 regulatory reports as of September 30, 2014 (except for trading and counterparty data). BHCs should reference the instructions associated with each schedule to determine the appropriate submission date for each regulatory report. The Federal Reserve will apply conservative assumptions to any missing or otherwise deficient FR Y-14 data in producing supervisory estimates if such deficiencies are not remedied by December 31, 2014.
- Missing data or data deficiency: If a BHC's submitted data quality is deemed to be too deficient to produce a robust supervisory model estimate for a particular portfolio, the Federal Reserve may assign a high loss rate (e.g., 90th percentile) or a conservative PPNR rate (e.g., 10th percentile) based on portfolio losses or PPNR estimated for other BHCs. If data that are direct inputs to supervisory models are missing or reported erroneously but the problem is isolated in a way that the existing supervisory framework can still be used, a conservative value (e.g., 10th or 90th percentile) based on all available data will be assigned to the specific data.
- Immaterial portfolio: Each BHC has the option to either submit or not submit the relevant data schedule for a given portfolio that does not meet a materiality threshold (as defined in FR Y-14Q and FR Y-14M instructions). If the BHC does not submit data on its immaterial portfolio(s), the Federal Reserve will assign a conservative loss rate (e.g., 75th percentile), based on the estimates for other BHCs. Otherwise, the Federal Reserve will estimate losses using data submitted by the BHC.
As part of CCAR, the Federal Reserve will conduct its post-stress capital analysis in the supervisory adverse and severely adverse scenarios using the BHCs' planned capital actions in the BHC baseline scenario. This assumption permits the Federal Reserve to assess whether a BHC would be capable of continuing to meet minimum capital requirements (the leverage, tier 1 risk-based, common equity tier 1 risk-based, and total risk-based capital ratios) and a tier 1 common capital ratio of at least 5 percent throughout the planning horizon, even if adverse or severely adverse stress conditions emerged and the BHC did not reduce planned capital distributions.43
Common Dividend Payouts
The appropriateness of planned capital actions will also be evaluated based on the common dividend payout ratio (common dividends relative to net income available to common shareholders) in the baseline scenario, and on the BHC's projected path to compliance with the revised regulatory capital framework under the supervisory baseline scenario as the revised regulatory capital framework is phased in.
The Federal Reserve expects that capital plans will reflect conservative common dividend payout ratios. Specifically, capital plans that imply common dividend payout ratios above 30 percent of projected after-tax net income available to common shareholders in either the BHC baseline or supervisory baseline will receive particularly close scrutiny.
Regulatory Capital Rule Transition Plans
As part of CCAR, the Federal Reserve evaluates whether a BHC's proposed capital actions are appropriate in light of the BHC's plans to meet the requirements of the revised regulatory capital framework after the transition periods set forth in that rule.
As part of its capital plan submission, a BHC should provide a transition plan that includes pro forma estimates under baseline conditions of the BHC's regulatory risk-based capital and leverage ratios under the revised regulatory capital framework. Generally, a BHC should maintain prudent earnings-retention policies with a view toward meeting the conservation buffer under the time frame described in the revised regulatory capital framework.44 Where applicable,
a BHC's regulatory capital transition plan should also incorporate a plan to meet the higher loss-absorbency requirements for global systemically important banks as estimated by management or the enhanced supplementary leverage ratio.45
A BHC should, through its capital plan, demonstrate an ability to maintain no less than steady progress along a path between its existing capital ratios based upon the revised regulatory capital framework and the fully phased-in requirements in 2019. The Federal Reserve will closely scrutinize plans that fall short of this supervisory expectation.
Some BHCs may exceed the transition targets over the near term, but not yet meet the fully phased-in targets. Those BHCs are expected to submit plans reflecting steady accretion of capital at a sufficient pace to demonstrate continual progress toward full compliance with the revised regulatory capital framework on a fully phased-in basis.
The Federal Reserve expects that any BHC performance projections that suggest that ratios would fall below the regulatory minimums at any point over the projection period would be accompanied by proposed actions that reflect affirmative steps to improve the BHC's capital ratios, including actions such as external capital raises, to provide great assurance that the BHC will meet the minimum requirements of the revised regulatory capital framework as they phase in.
Limited Adjustments to Planned Capital Actions
Upon completion of the quantitative and qualitative assessments of BHCs' capital plans, but before the disclosure of the final CCAR results, the Federal Reserve will provide each BHC with the results of the post-stress capital analysis for its BHC, and each BHC will have an opportunity to make a one-time adjustment to planned capital distributions. The only adjustment that will be considered is a reduction in the common stock distributions (e.g., common stock dividend and repurchases) relative to those initially submitted in the BHC's original capital plan. The Federal Reserve's final decision to object or not object will be informed by the BHC adjusted capital distributions.
The Federal Reserve has observed a practice where some BHCs have only adjusted the out quarters of the planning horizon that are not subject to objection in the current CCAR exercise (for CCAR 2015, those would be the projected third and fourth quarters of 2016), while leaving the quarters subject to objection unchanged. Without explanation, this practice erodes the credibility of a BHC's capital plan. Accordingly, a BHC that makes a one-time adjustment to its planned capital distributions should not solely concentrate the adjustment in the quarters not subject to objection in CCAR 2015.
Federal Reserve Responses to Planned Capital Actions
Based on the results of the qualitative and quantitative assessment, the Federal Reserve determines whether to authorize a BHC to undertake its planned capital actions during the next four quarters, covering the second quarter of the current year through the first quarter of the following year (the third through the sixth quarters of the CCAR 2015 planning horizon). For CCAR 2015, the Federal Reserve's authorization for capital distributions will extend five quarters, through June 30, 2016, in order to account for the shift in the capital plan cycle in 2016.46
For purposes of CCAR 2015, if a BHC receives a non-objection to its capital plan, the BHC generally may make the capital distributions included in its capital plan submission beginning on April 1, 2015, through June 30, 2016, without seeking prior approval from or providing prior notice to the Federal Reserve. (See "Execution of Capital Plan and Requests for Additional Distributions".)
If the BHC receives an objection to its capital plan, the BHC may not make any capital distribution other than those capital distributions with respect to which the Federal Reserve has indicated in writing its non-objection. In this instance, the Federal Reserve still may authorize the BHC to undertake certain distributions set forth in its capital plan, consistent with the quarterly path of authorized distributions, during this five-quarter period.
The Federal Reserve at all times retains the ability to ultimately object to capital distributions in future quarters if there is a material change in the BHC's risk profile (including a material change in its business strategy or any risk exposure), financial condition, or corporate structure, or if changes in financial markets or the macroeconomic outlook that could have a material impact on the BHC's risk profile and financial condition require the use of updated scenarios.
Disclosure of Supervisory Assessments
At the end of the CCAR process, the Federal Reserve intends to disclose publicly its decision to object or not object to a BHC's capital plan, along with a summary of the Federal Reserve's analyses of that company.
The Federal Reserve will publish a summary of the results of the Board's supervisory stress test of the company under the Dodd-Frank Act supervisory stress tests. The supervisory stress test disclosure will include results under both the supervisory adverse and severely adverse scenarios. The Federal Reserve will provide the detailed results of supervisory stress tests for each BHC, including stressed losses and revenues, and the post-stress capital ratios based on the capital action assumptions required under the Dodd-Frank Act stress test rules, along with an overview of methodologies used for supervisory stress tests. (See appendix B for the format that will be used to publish these data.)
In its disclosure of the CCAR results, the Federal Reserve will also publish the results of its post-stress capital analysis for each BHC, including BHC-specific post-stress regulatory capital ratios (leverage, common equity tier 1 risk-based, tier 1 risk-based, and total risk-based capital ratios) and the tier 1 common ratio estimated in the adverse and severely adverse scenarios. These results will be derived using the planned capital actions as provided under the BHC baseline scenario. The disclosed information will include minimum values of these ratios over the planning horizon, using the originally submitted planned capital actions under the baseline scenario and any adjusted capital distributions in the final capital plans, where applicable. (See appendix C for the format that will be used to publish these data.) In addition to the information about its quantitative assessment of the capital plans, the Federal Reserve will disclose the reasons for objections to specific BHCs' capital plans, including general information about the capital planning weaknesses that led to an objection to the BHC's capital plan for qualitative reasons.
Both sets of results, with the overview of methodologies and other information related to supervisory stress tests and CCAR, are expected to be published by March 31, 2015. BHCs will be required to disclose the results of their company-run stress tests within 15 days of the date the Board discloses the results of its Dodd-Frank Act supervisory stress test.47
Resubmissions
If a BHC receives an objection to its capital plan, it may choose to resubmit its plan in advance of the next CCAR exercise in the following year.
As detailed in the capital plan rule, a BHC must update and resubmit its capital plan if it determines there has been or will be a material change in the BHC's risk profile (including a material change in its business strategy or any material-risk exposures), financial condition, or corporate structure since the BHC adopted the capital plan. Further, the Federal Reserve may direct a BHC to revise and resubmit its capital plan for a number of reasons, including if a stress scenario developed by a BHC is not appropriate to its business model and portfolios or if changes in financial markets or the macroeconomic outlook that could have a material impact on a BHC's risk profile and financial condition requires the use of updated scenarios.
Submissions that are late, incomplete, or otherwise unclear could result in an objection to the resubmitted plan and a mandatory resubmission of a new plan, which may not be reviewed until the following quarter. Based on a review of a BHC's capital plan, supporting information, and data submissions, the Federal Reserve may require additional supporting information or analysis from a BHC, or require it to revise and resubmit its plan. Any of these may also result in the delay of evaluation of capital actions until a subsequent calendar quarter.
Execution of Capital Plan and Requests for Additional Distributions
The capital plan rule provides that a BHC generally must request prior approval of a capital distribution if the dollar amount of the capital distribution will exceed the amount described in the capital plan for which a non-objection was issued (gross distribution limit).48 In addition, a BHC generally must request the Board's non-objection for capital distributions included in the BHC's capital plan if the BHC has issued less capital of a given class of regulatory capital instrument (net of distributions) than the BHC had included in its capital plan, measured cumulatively, beginning with the third quarter of the planning horizon.49
For example, if a shortfall in capital issuance occurred in the third quarter, then the BHC may not make planned distributions in that quarter and subsequent quarters unless and until it offsets the excess net distributions. BHCs have the flexibility to credit excess issuances or lower distributions of capital than the amounts included in the company's capital plan for a given class of regulatory capital instrument to subsequent quarters.
A BHC should notify the Federal Reserve as early as possible before redeeming any capital instrument that counts as regulatory capital and that was not included in its capital plan or if it has excess net distributions.50 A BHC should use the CCAR Communications mailbox to submit any requests for capital (gross or net) not included in its capital plan.
Any such requests should reflect the change in the BHC's planned capital issuances and any other relevant changes in the capital plan. The BHC may be required to submit additional supporting information, including a revised capital plan, the BHC's forward-looking assessment of its capital adequacy under revised scenarios, any supporting information, and a description of any quantitative methods used that are different than those used in its original capital plan.51 The Federal Reserve will examine performance relative to the initial projections and the rationale for the request.
Under the capital plan rule, the Federal Reserve may object to a BHC's capital plan if the assumptions and analysis underlying the capital plan, or the BHC's methodologies for reviewing the robustness of its capital adequacy process, are not reasonable or appropriate. A BHC's consistent failure to execute planned capital issuances may be indicative of shortcomings in its capital planning processes and may indicate that the assumptions and analysis underlying the BHC's capital plan, or the BHC's methodologies for reviewing the robustness of its capital adequacy process, are not reasonable or appropriate. Accordingly, a consistent failure to execute capital issuances as indicated in its capital plan may form the basis for objection if the BHC is unable to explain the discrepancies between its planned and executed capital issuances.
References
39. See Board of Governors of the Federal Reserve System (2014), Dodd-Frank Act Stress Test 2014: Supervisory Stress Test Methodology and Results (Washington: Board of Governors, March), www.federalreserve.gov/newsevents/press/bcreg/bcreg20140320a1.pdf. Return to text
40. The LISCC framework is designed to materially increase the financial and operational resiliency of systemically important financial institutions to reduce the probability of, and cost associated with, their material financial distress or failure. See
www.federalreserve.gov/bankinforeg/large-institution-supervision.htm. Return to text
41. See 12 CFR 225.8(f)(2)(ii). Return to text
42. See 12 CFR 252.56(b). Return to text
43. The last four quarters of the planning horizon of CCAR 2015 will coincide with the initial portion of the risk-based framework's capital conservation buffer. See 12 CFR 217.11. For CCAR 2015, the effects of the capital conservation buffer distribution limitations are likely to be limited given the small portion of the buffer that will be effective during the planning horizon (0.625 percent, only one quarter the size of the fully phased-in buffer). Therefore, the Federal Reserve will not consider the limitation effects of the capital conservation buffer in the last four quarters of the CCAR 2015 planning horizon when performing its post-stress capital analysis of BHCs' planned capital distributions. The Board is considering the appropriate treatment of the capital conservation buffer distribution limitations in stress testing and capital planning for future CCAR exercises and intends to address this issue in due course. Return to text
44. 78 Fed. Reg. 62018 (October 11, 2013). Return to text
45. See Basel Committee on Banking Supervision (2013), "Global Systemically Important Banks: Updated Assessment Methodology and the Higher Loss Absorbency Requirement," rules text (Basel: BCBS, July), www.bis.org/publ/bcbs255.htm 
.; 79 Fed. Reg. 24528 (May 1, 2014); and 79 Fed. Reg. 57725 (September 26, 2014). Return to text
46. Starting January 1, 2016, the capital plan cycle will begin on January 1, and a BHC will be required to submit its capital plan to the Board by April 5 of that year. The Federal Reserve would respond to the BHC's capital plan by June 30 of that year. Return to text
47. See 12 CFR 252.58(a)(1). Return to text
48. A BHC is not required to provide prior notice and seek approval for distributions involving issuances of instruments that would qualify for inclusion in the numerator of regulatory capital ratios that were not included in the BHC's capital plan. See 12 CFR 225.8(g)(2)(iii)(B). Return to text
49. The classes of regulatory capital instruments are common equity tier 1, additional tier 1, and tier 2 capital instruments, as defined in 12 CFR 217.2. BHCs are not required to provide prior notice and seek approval for distributions included in their capital plans that are scheduled payments on addition tier 1 or tier 2 capital. Additionally, BHCs are not required to provide prior notice and seek approval where the shortfall in capital issuance (net of distributions) is due to employee-directed capital issuances related to an employee stock ownership plan; a planned merger or acquisition that is no longer expected to be consummated or for which the consideration paid is lower than the projected price in the capital plan; or if aggregate excess net distributions is less than 1 percent of the BHC's tier 1 capital. See 12 CFR 225.8(g)(2)(iii). Return to text
50. See 12 CFR 225.8(f) for circumstances under which approval would be required where a BHC had received a non-objection to its capital plan. Return to text
51. See 12 CFR 225.8(g)(4). Return to text