Supervisory Expectations for a Capital Adequacy Process

The description of a BHC's process for assessing capital adequacy is an important component of the BHC's capital plan. As discussed in supervisory guidance, a BHC's capital adequacy process should have as its foundation a full understanding of the risks arising from its exposures and business activities, as well as stress testing analysis, to ensure that it holds sufficient capital corresponding to those risks to maintain operations across the planning horizon.

The detailed description of a company's capital adequacy process should include a discussion of how, under stressful conditions, the BHC will maintain capital commensurate with its risks--above the minimum regulatory capital ratios and the BHC's internal capital goals--and serve as a source of strength to its depository institution subsidiaries. The full range of supervisory expectations, including governance and oversight expectations to complement the capital adequacy process aspects mentioned above, are summarized in figure 1, "Seven principles of an effective capital adequacy process."

The remainder of this section provides additional detail on these elements. BHCs should also refer to existing guidance for further information about supervisory expectations for a BHC's capital adequacy process, including Capital Planning at Large Bank Holding Companies: Supervisory Expectations and Current Range of Practice ²⁸ and the common themes observed across BHCs that were provided with the CCAR 2014 feedback letters. An updated version of the common themes from CCAR 2014 is provided in appendix A of this publication.

Figure 1. Seven principles of an effective capital adequacy process
Principle 1: Sound foundational risk management	The BHC has a sound risk-measurement and risk-management infrastructure that supports the identification, measurement, assessment, and control of all material risks arising from its exposures and business activities.
Principle 2: Effective loss-estimation methodologies	The BHC has effective processes for translating risk measures into estimates of potential losses over a range of stressful scenarios and environments and for aggregating those estimated losses across the BHC.
Principle 3: Solid resource-estimation methodologies	The BHC has a clear definition of available capital resources and an effective process for estimating available capital resources (including any projected revenues) over the same range of stressful scenarios and environments used for estimating losses.
Principle 4: Sufficient capital adequacy impact assessment	The BHC has processes for bringing together estimates of losses and capital resources to assess the combined impact on capital adequacy in relation to the BHC’s stated goals for the level and composition of capital.
Principle 5: Comprehensive capital policy and capital planning	The BHC has a comprehensive capital policy and robust capital planning practices for establishing capital goals, determining appropriate capital levels and composition of capital, making decisions about capital actions, and maintaining capital contingency plans.
Principle 6: Robust internal controls	The BHC has robust internal controls governing capital adequacy process components, including policies and procedures; change control; model validation and independent review; comprehensive documentation; and review by internal audit.
Principle 7: Effective governance	The BHC has effective board and senior management oversight of the CAP, including periodic review of the BHC’s risk infrastructure and loss- and resource-estimation methodologies; evaluation of capital goals; assessment of the appropriateness of stressful scenarios considered; regular review of any limitations and uncertainties in all aspects of the CAP; and approval of capital decisions.

Estimates of Projected Revenues, Losses, Reserves, and Pro Forma Capital Levels

For the purposes of CCAR, each BHC is to submit its capital plan supported by its internal capital adequacy process and include post-stress results under various scenarios. The Federal Reserve will be assessing the processes and practices each BHC has in place to carry out this analysis, including the risk-identification, risk-measurement, and risk-management practices supporting its analyses, as well as the governance and internal controls around these practices.

A BHC should demonstrate that its results are consistent with the environments specified in the scenarios being used, and that the various components of its results are internally consistent. For example, it would be generally inconsistent to project a shrinking balance sheet or declining RWAs while also projecting large increases in net income in a stress or baseline environment.

Hypothetical behavioral responses by BHC management should not be considered as mitigating factors for the purposes of this analysis. For example, hedges already in place should be accounted for as potential mitigating factors, but not assumptions about potential future hedging activities.

A BHC should clearly identify and document any aspects of its portfolios and exposures that are not adequately captured in the FR Y-14 schedules and that it believes are material to loss estimates for its portfolios, and explain the reason why the FR Y-14 is not accurately capturing such exposures. The BHC should also fully describe its estimate of the potential impact of such items on financial performance and loss estimates under the baseline and stress scenarios. Some examples may include portfolios with contractual loss-mitigation arrangements or contingent risks from intraday exposures.

Another example is pipeline risk associated with loan syndication, securitization, or other activities that are particularly sensitive to market conditions (such as loans to low-quality borrowers, including high-yield corporate bonds and leveraged loans) and that may become more acute during the period of stress. In this context, pipeline risk should encompass more than just losses on loans already in the pipeline at the start of the exercise and include the possibility that the pipeline may grow during stress.

A BHC's projections should reflect expectations of customer drawdowns on unused credit commitments under each scenario. The BHC should also consider in its projections the potential effect of any assets and exposures that might be taken back on the balance sheet or otherwise generate losses under stressful economic conditions (e.g., assets held in asset-backed commercial paper conduits and other off-balance sheet funding vehicles to which the BHC provides support). Similarly, the BHC should consider unconsolidated entities to which the BHC has potential exposure in its projections. If non-contractual support may be provided during a stressful environment for certain obligations or exposures of sponsored or third-party entities, these should be included in a BHC's analysis of contingent or potential obligations, and all associated impacts should be captured.

A BHC's projections must take into account all material risks to the BHC regardless of whether those risks are explicitly covered by the information requested in the FR Y-14 schedules. The BHC is responsible for identifying all potential material sources of losses from on- and off-balance sheet positions in its post-stress projections, as well as any other events that have the potential to materially affect capital in both baseline and stressful environments. The Federal Reserve's evaluation of a BHC's capital plan will focus on whether the BHC has an adequate process for identifying the full range of relevant risks, given the BHC's exposures and business mix, and whether the BHC appropriately assesses the impact of those risks on the BHC's financial results and capital. (See "Risk-identification program and mapping of material risks to capital plan" under "Supporting Documentation for Analyses Used in Capital Plans".)

A BHC should incorporate and document any pertinent details that would affect the production of its estimates. Importantly, the BHC should discuss assumptions around accounting treatment, anticipated changes in asset values or changes in customer behavior, model or management overlays, and application of expert judgment to provide support for the reasonableness of estimated losses.

Sensitivity analysis: Having an understanding of the sensitivity of post-stress financial estimates to the various inputs and assumptions developed to support the forecasting process is an important aspect of developing sound estimates of projected losses, revenues, reserves, and capital levels. Sensitivity analysis is an important tool that tests the robustness of models and enhances reporting for BHC management, the board of directors, and the Federal Reserve. BHCs should use sensitivity analysis to understand the range of potential estimates based on changes to inputs and key assumptions as well as the uncertainties associated with those estimates. Examples of key assumptions that should be subject to sensitivity analysis include projected market share, size of the mortgage market, cost and flow of deposits, utilization rate of credit lines, discount rates, or level and composition of trading assets. Management should have a full understanding of key sensitivities in estimates and highlight those to the board so that the board understands the sensitivity of capital to alternative inputs and assumptions and can make informed capital decisions.

Model risk management: For all models used in internal capital planning, BHCs should follow existing supervisory expectations regarding model risk management, in particular the "Supervisory Guidance on Model Risk Management."²⁹ Such expectations cover (1) model development, implementation, and use; (2) independent review and validation; and (3) model governance. As part of validation, BHCs should conduct conceptual soundness reviews, ongoing monitoring (including benchmarking), and outcomes analysis. The Federal Reserve recognizes that BHCs may be challenged in conducting full outcomes analysis for some of their stress test models, given the lack of realized outcomes against which to test. In such cases, BHCs should use sensitivity analysis, additional benchmarks, or other means to help assess model performance. They may also need to apply compensating controls to account for additional model uncertainty that exists in such instances. It is critical that BHCs assess the vulnerability of their models to error, understand any other limitations, and consider the risk to the BHC should estimates based on those models prove materially inaccurate.

All models should be evaluated for their intended use. While use of existing risk-measurement models and processes for producing stress loss estimates may be acceptable, BHCs should consider whether these models and processes generate outputs that are relevant in stressful conditions. Use of such models may need to be supplemented with other data elements and alternative methodologies.

BHCs may use expert judgment, such as management overlays to modeled outputs, to compensate for model limitations, such as data limitations or material changes in a BHC's business. When using such judgment-based approaches, as with any estimation methodology, BHCs should have a transparent, repeatable, well-supported process that generates credible estimates that are consistent with assumed scenario conditions. Any model overrides or overlays--including those based solely on expert judgment--should also be subject to oversight and review by an internal validation group or other independent reviewers, with the recognition that the work done to evaluate overlays to model output may be different than the validation work to evaluate and test the model and model output.

BHCs should also ensure that any vendor or other third-party models are used in accordance with expectations for model risk management. Finally, the intensity and frequency of model risk management activities should be a function of model materiality.

Loss Estimation

Loans held in accrual portfolios: Estimated losses on loans held in accrual portfolios are generally credit losses due to failure to pay obligations (cash flow losses), rather than discounts related to mark-to-market (MTM) values. In some cases, BHCs may have loans that are being held for sale or which are subject to purchase-accounting adjustments. In these cases, the analysis should anticipate the change in value of the underlying asset, apply the appropriate accounting treatment, and determine the incremental losses.

Fair value loans: BHCs may have loans that are held for sale or held for investment, for which they have adopted fair value accounting (collectively, fair value loans). Losses on fair value loans should reflect both expected changes in fair value of the loan and any losses that may result from an obligor default under a given scenario. BHCs should clearly document the method and key assumptions used to compute losses on fair value loans.³⁰

Losses on available-for-sale (AFS) and held-to-maturity (HTM) securities: BHCs should provide projected other-than-temporary impairments (OTTI) for AFS and HTM securities. OTTI projections should be based on September 30, 2014, positions and should be consistent with specified macroeconomic assumptions and standard accounting treatment. If the BHC bifurcates credit losses from other losses, the method for deriving the bifurcation should be provided in supporting documentation.

Trading and counterparty losses: Any BHC with material trading and counterparty exposures should calculate potential losses from those exposures under its BHC stress scenario. The BHC should ensure that projected losses are consistent with the market environment assumed in its stress scenario and clearly document the method and key assumptions supporting the loss estimate. There is no expectation that a BHC should use approaches similar to the global market shock or counterparty default scenario components of the supervisory stress scenarios to capture market or counterparty risk in its internally constructed BHC stress scenario.

Allowance for loan losses: BHCs should estimate the portion of the current allowance for loan losses available to absorb credit losses on the loan portfolio for each quarter under each scenario while maintaining an adequate allowance along the scenario path and at the end of the planning horizon. Loan-loss reserve adequacy should be assessed against the size, composition, and risk characteristics of the loan portfolio projected over the planning horizon under a given scenario in a manner that is consistent with the BHC's projections of losses in that scenario.

Pre-Provision Net Revenue Estimation

In general, BHCs are required to demonstrate that the approach used to generate PPNR estimates is consistent with the economic and financial environment specified in the relevant scenario. BHCs must ensure that PPNR projections are explicitly based on, and directly tied to, balance sheet and other exposure assumptions used for related loss estimates.

In addition, BHCs should apply assumptions consistent with the scenario when projecting PPNR for fee-based lines of business (e.g., asset management) and ensure that the assumed business strategy is feasible under the scenario. In addition, BHCs should also ensure that expenses are appropriately taking into account both the direct effects of the economic environment (e.g., foreclosure costs) and projected revenues. The models and business processes used to make projections should be sufficiently documented so as to allow for supervisory assessment.

Trading revenues: All BHCs with trading activities and private-equity investments should project the effect of various scenarios on their trading revenue over the planning horizon. In making these projections, BHCs should demonstrate that their historical data selection and general approach is credible and applicable to the assumed macroeconomic scenario. BHCs should not assume that trading-related PPNR could never fall below historical levels.

Mortgage servicing rights (MSR): All revenue and expenses related to MSRs and the associated non-interest income and non-interest expense line items must be reported on the PPNR schedules.

Residential mortgage representations and warranties: As part of PPNR, BHCs must estimate losses associated with requests by mortgage investors, including both government-sponsored enterprises and private-label securities holders, to repurchase loans deemed to have breached representations and warranties, or with investor litigation that broadly seeks compensation from BHCs for losses. BHCs should consider not only how the macro scenarios could affect losses from repurchased loans, but also a range of legal process outcomes, including worse-than-expected resolutions of the various contract claims or threatened or pending litigation against the BHC and against various industry participants. BHCs should provide appropriate support of the adverse litigation expense-related outcomes considered in their analysis.

Operational risk losses: Projections of losses arising from inadequate or failed internal processes, people and systems, or from external events must be reported by the BHC as operational risk losses, a component of PPNR. In general, baseline projections are expected to match up reasonably with historical, realized losses, taking into account any expected outcomes of current ongoing or pending litigation or other operational events.

BHCs should use a conservative approach to project operational risk losses for the stress scenario. Specifically, operational risk losses under stress scenarios are expected to be higher than the baseline projections regardless of whether the losses can be directly linked to the stressed economic environment. The Federal Reserve expects operational risk estimates in the BHC stress scenario to capture bank-specific operational risks identified through existing risk-management tools such as risk assessments, key risk reports, and scenario analysis. BHCs should be able to demonstrate a detailed understanding of the operational risks facing the organization and provide reasonable estimates of potential operational risk losses.

The credibility of any empirical analysis relies on the relevance, accuracy, comprehensiveness, appropriate classification, and internal consistency of the underlying data. The BHC should therefore give close attention to data issues that can affect the credibility of the projected operational risk losses. For example, the BHC should include all relevant historical data, including legal reserves, in any analysis, and justify the exclusion of any historical losses. A BHC should generally use gross losses in its operational risk projections. If the BHC uses losses net of recoveries, it should provide a strong justification, as such recoveries may not occur during a stressed environment. The BHC should provide justification for the dates used in the analysis (e.g., accounting, discovery, or occurrence date) and provide analysis on how the results would be affected by the use of specific dates. When available, the BHC should consider relevant external data, scenario data, and business environment and internal control factors data in the analysis, particularly when internal loss data is limited. The process for selecting the data should be internally consistent, well-reasoned, clearly documented, and understood by the banking organization personnel responsible for its use.

The BHC should consider a variety of benchmarks in assessing the reasonableness of its operational risk loss projections. Some examples of such benchmarks might include average nine-quarter cumulative operational risk losses and the most recent representative nine-quarter cumulative operational risk losses to benchmark the baseline scenario, and the worst historical nine-quarter cumulative operational risk losses to benchmark the stressed scenarios.

As with loss estimates in other areas, the Federal Reserve expects BHCs to estimate legal costs (including expenses, judgments, fines, and settlements) that could occur under baseline and stressful environments. When projecting legal costs in stress scenarios, a BHC should assume unfavorable, stressed outcomes on current, pending, threatened, or otherwise possible claims of all types. Estimates of stressed legal losses and other costs and expenses should be well supported by detailed underlying analysis.

Balance Sheet and Risk-Weighted Assets Projections

Balance sheet projections: Balances should be driven by the dynamic interaction of various flows through the planning horizon and should reconcile to projections for originations, pay-downs, drawdowns, and losses under each scenario. In stress scenarios, care should be taken to justify major changes in portfolio composition based, for example, on assumptions about a BHC's strategic direction, including events such as material sales or purchases. The losses used in producing balances should be the same as those produced in internal loss-estimate modeling for the stress test. Prepayment behavior should link to the relevant economic scenario and the maturity profile of the asset portfolio. Any assumed reallocation of assets into securities or cash should recognize the limits of portfolio transformation under stress due to market pressures and current portfolio characteristics, including the likely state of interbank lending markets and deposit levels.

To the extent that changes in the balance sheet are driven by a BHC's strategic direction, care should be taken to document underlying assumptions, and the BHC should provide a detailed explanation supporting the reasonableness of those assumptions in a stressed economic and financial market environment. For example, a BHC should specifically evaluate the implications of other market participants possibly taking actions similar to its own in a stressed environment. For example, the possible positive outcomes that might be obtained if a BHC were the only market participant taking such actions in a particular market environment may not be fully realized if others are also attempting to take similar actions.

RWA projections: Given that the as-of-date RWAs calculated for regulatory reporting serves as the foundation for RWA projections in scenario analysis, a BHC should ensure point-in-time RWA processes appropriately capture all relevant on- and off-balance sheet exposures and are consistent with the various risk-weighting frameworks to which the BHC is subject.³¹

The BHC should provide detailed support for all assumptions used to derive projections of RWAs, including assumptions related to components of balance sheet projections (on- and off-balance sheet balances and composition), income statement projections, and underlying risk attributes of exposures. It should document any known weakness in the translation of assumptions into RWA estimates for each scenario and any compensating measures the BHC took in response. For example, a BHC should demonstrate how credit RWAs over the planning horizon are related to projected loan growth under the macroeconomic scenario, increased credit provisions or charge-offs for loan portfolios, and changing economic assumptions as well as how market RWAs are related to market factors (e.g., volatility levels, equity index levels, bond spreads, etc.) and projected trading revenue.

Each BHC should demonstrate that these assumptions are clearly conditioned on a given scenario and are consistent with stated internal and external business strategies. If BHC-specific assumptions are used, the BHC should also describe these assumptions and how they relate to reported RWA projections. If the BHC's models for projecting RWAs rely upon historical relationships, the BHC should provide the historical data and clearly describe why these relationships are expected to be maintained in each scenario.

Trading and counterparty RWAs: In general, all BHCs in the LISCC portfolio as well as any BHCs subject to the market risk rule that report (1) trading assets and liabilities of greater than $10 billion or (2) trading assets and liabilities of greater than 10 percent of total assets at the as-of date for reporting should project market risk RWAs using a quantitative methodology that captures both changes in exposures and changes in volatility implied by stress conditions over time. BHCs should document the rationale for any significant changes in risk weighting assigned to the trading book, particularly in cases where projections show the ratio of trading book RWAs-to-trading exposures and trading asset balances declining over time or under stress conditions.

Additionally, any BHC subject to the market risk rule must use standard, specific-risk charges for any positions or portfolios for which the BHC has not received any required specific-risk-model approval, incremental risk-model approval, or comprehensive risk-model approval for the position or portfolio as of January 5, 2015. In addition, if a BHC does not have an approved Stressed Value at Risk (SVaR) model as of January 5, 2015, the BHC must specify this in writing.

Regulatory Capital Projections

BHCs are to provide data on the balances of regulatory capital instruments under current U.S. capital adequacy guidelines and under the revised regulatory capital framework for quarters of the planning horizon in which they are subject to the revised regulatory capital framework, aggregated by instrument type based on actual balances as of September 30 of the current calendar year and projected balances as of each quarter end through the remaining planning horizon.³² BHCs are to report information both on a notional basis and on the basis of the dollar amount included in regulatory capital.

Other comprehensive income (OCI): Advanced approaches BHCs should project the components of OCI, including unrealized gains and losses on their AFS securities. The accumulated components of OCI should be included in projections of regulatory capital under each scenario, accounting for any transition arrangements in the revised regulatory capital framework over the nine-quarter planning horizon as appropriate.

Regulatory capital transitions: In the transition plan, a BHC must include estimates of the composition and levels of regulatory capital, RWAs (based on the standardized approach and advanced approaches, where applicable), and leverage ratio exposures used to calculate regulatory capital ratios under the supervisory baseline scenario. Each BHC's submission should include supporting documentation on all material planned actions that the BHC intends to pursue in order to meet the minimum regulatory capital ratios per the revised regulatory capital framework, including, but not limited to, the run-off or sale of existing portfolio(s), the issuance of regulatory capital instruments, and other strategic corporate actions.

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Supporting Documentation for Analyses Used in Capital Plans

Methodology and model inventory: BHCs are required to provide the Federal Reserve with an inventory of all models and methodologies used to estimate losses, revenues, expenses, balances, and RWAs in CCAR 2015.³³ The inventory should start with the FR Y-14A line items and provide the list of models or methodologies used for each item under each scenario and note the status of the validation or independent review each model or methodology (e.g., completed, in progress). The model inventory must include the name of the model, which should then be consistently referred to in all technical documentation.

Risk-identification program and mapping of material risks to capital plan: One particular area of supervisory focus will be an assessment of the comprehensiveness of a BHC's process for identifying the full range of relevant risks, given the BHC's exposures and business mix. Each capital plan submission should include documentation outlining the risk identification process the BHC uses to support the BHC-wide stress testing required in the capital plans.³⁴ The documentation should describe the BHC's processes to identify all known material risks, including emerging risks that the BHC may face in a changing economic environment, given its size, activities, and risk exposures and commitments, both on- and off-balance sheet.

A BHC's material risk identification process should be transparent and repeatable, and translate efficiently into estimates of potential losses over a range of scenarios and environments. An assessment of the comprehensiveness of risk identification is a critical aspect of the supervisory assessment of a BHC's capital adequacy process. The BHC should assess the data, infrastructure, and technology, including the management information systems (MIS) that support the BHC's material risk identification process, for reliability and comprehensiveness.

Where weaknesses in capturing, aggregating, or measuring risk exposures exist, the BHC should describe the processes and mitigating controls employed to compensate for those deficiencies or weaknesses in the risk identification process. The board of directors should have a clear understanding of where the risk identification and measurement process may be compromised.

Each BHC should develop and maintain a comprehensive inventory of risks to which they are exposed, and refresh it as conditions warrant, such as changes in the business mix and the operating environment. The BHC should be able to demonstrate how its identified risks are accounted for in its capital adequacy process and seek to capture all applicable material risks in the enterprise-wide scenario analysis. If certain risks are not explicitly incorporated into an enterprise-wide scenario analysis, a BHC should note how all material risks are accounted for in other aspects of its capital planning process. Best practice is to develop and maintain a detailed mapping of how and where these risks are captured in the BHC's capital adequacy process.

Documentation related to the BHC scenario: A BHC's scenario design process should result in a coherent, logical narrative of economic and financial market factors and potential BHC-specific events that appropriately stress the BHC's firm-wide inventory of material risks. Assumptions should remain constant across business lines and risk areas for the chosen scenario, since the objective is to see how the BHC as a whole will be affected by a common scenario that is consistently applied.

A BHC should consider the best manner in which to capture combinations of stressful events and circumstances, including second-order and "knock-on" effects that may result from the specified economic and financial market environment or any potential BHC-specific event. The use of expert judgment or management overlays is acceptable and should be carefully explained and supported by empirical evidence. Supervisors will focus particular attention on a BHC's ability to adequately support the approach and methodologies used for its BHC scenarios and assess the impact to loss and PPNR estimates. In addition, the BHC is required to provide a comprehensive listing of the paths of all key variables used in each scenario in the FR Y-14A Scenario schedule.

Within the supporting documentation, each BHC should discuss how the BHC stress scenario stresses the specific vulnerabilities of the BHC's risk profile and operations. Best practice is to clearly map the BHC's identified material risks to the elements incorporated within the BHC stress scenario to ensure that all exposures are appropriately stressed and considered for full impact on capital and discuss how material risks that are not explicitly incorporated into the BHC scenario are considered and addressed as part of the BHC's capital adequacy process.

Documentation of internal stress testing methodologies and assumptions: A BHC should include in its capital plan submissions thorough documentation of key methodologies and assumptions used in performing stress testing. Documentation should clearly describe the model-development process, the derivation of outcomes, and validation procedures. Supporting documentation should clearly describe any known data issues or model weaknesses and how such information is factored into the capital plan.

Senior management should provide its board of directors with sufficient information to facilitate the board's understanding of the stress testing analysis used by the BHC for capital planning purposes, including any identified weaknesses that increase uncertainty in the estimation process.

The BHC must provide credible support for BHC-specific assumptions, including any known weaknesses in the translation of assumptions into loss and resource estimates. For example, an overreliance on past patterns of credit migration (the basis for roll rate and ratings transition models) may be a weakness when considering stress scenarios, particularly when the available data do not contain a period of significant stress.

The BHC should demonstrate that its approaches are clearly conditioned on the scenarios being used. While judgment is an essential part of risk measurement and risk management, including for loss-estimation purposes, a BHC should not be overly reliant on judgment to prepare their loss estimates and should provide documentation or evidence of transparency and discipline around the process. Any management judgment applied should be adequately supported and in line with scenario conditions and should be consistently conservative in the assumptions made to arrive at loss rates. There should also be appropriate challenge of assumptions by senior management. Senior management should provide sufficient information to the board of directors so that the board can understand the key assumptions, challenges made by senior management, and any responses to those challenges and can effectively challenge reported results before making capital decisions.

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Description of All Capital Actions Assumed over the Planning Horizon

As part of the quantitative assessment of a BHC's capital plan, the Federal Reserve considers the BHC's description of all planned capital actions over the planning horizon, including both capital issuances and capital distributions, and relies on these descriptions of the planned capital actions as a basis for its decisions about the BHC's capital plan.

As detailed in the capital plan rule, a capital action is any issuance of a debt or equity capital instrument, any capital distribution, and any similar action that the Federal Reserve determines could impact a BHC's consolidated capital. A capital distribution is a redemption or repurchase of any debt or equity capital instrument, a payment of common or preferred stock dividends, a payment that may be temporarily or permanently suspended by the issuer on any instrument that is eligible for inclusion in the numerator of any minimum regulatory capital ratio, and any similar transaction that the Federal Reserve determines to be in substance a distribution of capital.

Organization of description of capital actions: BHCs must provide a description of their planned capital actions.³⁵ BHCs are also required to report their planned capital actions on the FR Y-14A Summary schedule under the BHC baseline scenario and on the FR Y-14A Regulatory Capital Instruments schedule. BHCs should organize the description of the planned capital actions in their capital plan in a manner that permits comparison with the schedules. One method of organization would be a table, such as table 4, that presents the capital actions by type of capital instrument over the quarterly path.

Table 4. Summary of planned capital actions, CCAR 2015

	2014:Q4	2015:Q1	2015:Q2	2015:Q3	2015:Q4	2016:Q1	2016:Q2	2016:Q3	2016:Q4	9-quarter
Dividends
Common dividends/share ($)										n.a.
Common dividends
Preferred dividends
Repurchases and redemptions
Common stock issuance
Common stock repurchase (gross)
Common stock repurchase (net)
Preferred stock issuance
Preferred stock repurchase (gross)
Preferred stock repurchase (net)
TruPS issuance
TruPS repurchase (gross)
TruPS repurchase (net)
Subordinated debt issuance
Subordinated debt repurchase (gross)
Subordinated debt repurchase (net)
Other capital instruments (gross)
Other capital instruments (gross)
Other capital instruments (net)
Millions of dollars

n.a. Not applicable.

TruPS Trust preferred securities.

Planned capital actions in out-quarters of planning horizon: The Federal Reserve has observed a practice whereby some BHCs have included markedly reduced distributions in the final quarters of the planning horizon (i.e., the quarters that are not subject to objection in the current capital plan cycle, referred to as ‘‘out-quarters'') relative to the distributions in the preceding quarters of the capital plan where the distributions are subject to possible objection in the current cycle. A BHC should project its distributions in the final quarters of its capital plan based on realistic assumptions about the future and in a manner broadly consistent with previous quarters, unless the BHC is in fact planning to reduce its distributions.

The Federal Reserve will closely monitor a BHC's planned capital actions to the extent the distribution occurring in the out-quarters of capital plans are lower than the distributions for the same quarters included in the BHC's capital plan for the next cycle. If BHCs are unable to provide sufficient explanation for increases in planned capital actions once the quarter is subject to review and possible objection, the Federal Reserve may see that as an indication of shortcomings in a BHC's capital adequacy process or that the assumptions and analyses underlying the capital plan, or the BHC's methodologies for reviewing the robustness of its capital adequacy process, are not reasonable or appropriate. Under the capital plan rule, the Federal Reserve may object to a capital plan because the assumptions and analyses underlying the BHC's capital plan are not reasonable or appropriate, and the practice of reducing planned capital distributions in the out-quarters therefore may form the basis for objection to a BHC's capital plan.³⁶

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Expected Changes to Business Plans Affecting Capital Adequacy or Funding

Each BHC should include in its capital plan a discussion of any expected changes to the BHC's business plan that are likely to have a material impact on the BHC's capital adequacy and liquidity.³⁷ Examples of changes to a business plan that may have a material impact could include a proposed merger or divestiture, changes in key business strategies, or significant investments. However, a BHC should not include a divestiture that has not been completed or contractually agreed prior to January 5, 2015, in its capital plan submission.

In this discussion, the company should consider not just the impacts of these expected changes, but also the potential adverse consequences should the actions not result in the planned changes--e.g., a merger plan falls through, a change in business strategy is not achieved, or there is a loss on the planned significant investment.

Subsidiaries of foreign banking organizations: For the purposes of CCAR 2015, a U.S. BHC that will be designated as the U.S. intermediate holding company for a foreign banking organization's U.S. operations will not to be required to include the transfer of subsidiaries in accordance with the U.S. intermediate holding company requirement in its capital plan projections.³⁸ The Federal Reserve recognizes that modeling the effects of this transfer would require BHCs to adjust their management information and accounting systems to take into account exposures across the entire U.S. operations of a foreign banking organization, which may introduce significant complexities into a BHC's capital planning and stress testing. The Federal Reserve will provide this one-time relief from including assets transferred into the U.S. BHC in capital plan projections with the expectation that, generally, the U.S. BHC subsidiary that will be designated as the U.S. intermediate holding company will have a capital plan that includes planned capital distributions (net of capital issuance) that are equal to or lower than those included in the BHC's capital plan for the previous cycle. The Federal Reserve expects that such U.S. BHCs will retain capital compared with previous capital plans in preparation for compliance with the U.S. intermediate holding company requirement.

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References

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