Comprehensive Capital Analysis and Review 2015:
Assessment Framework and Results, March 2015
Print- Preface
- Executive Summary
- Requirements in CCAR 2015
Executive Summary
Large bank holding companies (BHCs) have built a significant amount of capital since the financial crisis--nearly doubling their capital levels--in part because of supervisory programs like the Comprehensive Capital Analysis and Review (CCAR). (For more information on recent trends in capital levels, see box 1.) Capital is central to a BHC's ability to absorb losses and continue to lend to creditworthy businesses and consumers. The crisis illustrated that confidence in the capitalization and overall financial strength of a BHC can erode rapidly in the face of changes in current or expected economic and financial conditions. More importantly, the crisis revealed that a loss of investor and counterparty confidence in the financial strength of a systemically important BHC not only imperils that BHC's viability, but also harms the broader financial system. For this reason, the Federal Reserve has made assessments of capital planning and analysis of capital adequacy on a post-stress basis a cornerstone of its supervision of the largest and most complex financial institutions.
The Federal Reserve's annual CCAR is an intensive assessment of the capital adequacy of large, complex U.S. BHCs. Through CCAR, the Federal Reserve seeks to ensure that large BHCs have strong processes for assessing their capital needs that are supported by effective firmwide risk-identification, risk-measurement, and risk-management practices; strong internal controls; and effective oversight by boards of directors and senior management. CCAR helps promote greater resiliency at the firms by requiring each BHC to support its capital management decisions with forward-looking comprehensive analysis that takes into account the BHC's unique risk profile and activities as well as the effect of highly stressful operating environments on financial performance. The CCAR process also can help act as a counterweight to pressures that a BHC may face to use capital distributions to signal financial strength, even when facing a deteriorating or highly stressful environment.
CCAR also allows the Federal Reserve to expand upon its firm-specific supervisory practices by undertaking a simultaneous, horizontal assessment of capital adequacy and capital planning processes at the largest U.S. BHCs. In addition, the evaluations and results of CCAR serve as inputs into other aspects of the Federal Reserve's supervisory program for these BHCs and factor into supervisory assessments of each BHC's risk-management, corporate governance, and internal controls processes. Information gathered through the CCAR assessment also serves as a key input into evaluations of a BHC's capitalization and overall financial condition.
This report provides
- background on the CCAR requirements;
- a description of the assessment framework and factors the Federal Reserve uses in reviewing BHCs' capital plans;
- a summary of the CCAR 2015 results, including the Federal Reserve's objection and non-objection decisions on BHCs' 2015 capital plans; and
- information about the process and requirements of CCAR 2015, including the consequences of objections to a capital plan, the execution of planned capital distributions, the process for resubmitting a capital plan, and feedback provided by the Federal Reserve on a BHC's capital plan.
Box 1. Overview of Trends in Capital Levels for Large U.S. BHCs
Figure A provides the aggregate ratio of common equity capital to risk-weighted assets for the 31 firms in CCAR from 2009 through 2014.1 This ratio has more than doubled from 5.5 percent in the first quarter of 2009 to 12.5 percent in the fourth quarter of 2014. That gain reflects a total increase of more than $641 billion in common equity capital from the beginning of 2009 among these BHCs, bringing their aggregate common equity capital to $1.1 trillion in the fourth quarter of 2014.
Common equity capital is expected to continue to increase, as all but one of the 31 BHCs participating in CCAR 2015 is expected to further increase common equity between the second quarter of 2015 and the second quarter of 2016, based on their planned capital actions under their baseline scenario.
The 31 BHCs that are part of this year's CCAR hold more than 80 percent of the total assets of all U.S. BHCs. The financial crisis revealed that both the quantity and quality of capital contribute to a BHC's ability to continue operations under adverse conditions. In part through programs like CCAR, the quantity and quality of capital held by these BHCs have continued to improve, increasing the resilience of the banking sector and strengthening the financial system more broadly.
T1C Tier 1 common.
CET1 Common equity tier 1.
Source: FR Y-9C. From 2009 through 2013, tier 1 common was used to measure common equity capital for all BHCs. In 2014, both tier 1 common capital (for non-advanced approaches BHCs) and common equity tier 1 capital (for advanced approaches BHCs) were used.
1. The Federal Reserve's evaluation of a BHC's common equity capital was initially measured using a tier 1 common capital ratio and now also uses a common equity tier 1 capital ratio, which was introduced into the regulatory capital framework with the implementation of Basel III. From 2009 through 2013, tier 1 common was used to measure common equity capital for all BHCs. In 2014, both tier 1 common capital (for non-advanced approaches BHCs) and common equity tier 1 capital (for advanced approaches BHCs that are subject to Basel III) were used. Under both measures, BHCs have significantly increased their capital position since 2009. Return to text
Return to textOverview of Aggregate Results
The financial crisis exposed a number of critical weaknesses across the largest banks and highlighted that many BHCs had a limited ability to effectively identify, measure, and control their risks, and to assess their capital needs. While BHCs have better practices in place today than they did before the crisis, many continue to have challenges in fully meeting supervisory expectations for capital planning. As has been previously noted, the Federal Reserve has allowed firms some time to work toward full achieve-ment of its high standards for capital planning.2 The largest BHCs, and in particular those in the Large Institution Supervision Coordinating Committee (LISCC) portfolio, must continue to improve in areas where they exhibit shortcomings in order to make the steady progress that the Federal Reserve expects them to make.3 The Federal Reserve observes that, on balance, the strength of the capital planning processes at most of the 31 BHCs participating in CCAR continues to improve. The Federal Reserve will continue to closely monitor their progress throughout the year and as part of its annual CCAR program.
In the supervisory post-stress capital assessment, the Federal Reserve estimates that the aggregate tier 1 common ratio, accounting for any adjustments in planned capital actions, for the 31 BHCs would decline in the severely adverse scenario from 11.9 percent in the third quarter of 2014 (the starting point for the exercise) to 7.1 percent at its minimum point over the planning horizon. (See tables 1 and 2 for more on the aggregate post-stress capital ratios for the 31 BHCs that participate in CCAR 2015).
In CCAR 2015, the Federal Reserve did not object to the capital plan and planned capital distributions for 29 of the 31 BHCs. The Board of Governors objected to the capital plans of Deutsche Bank Trust Corporation and Santander Holdings USA, Inc. due to widespread and substantial weaknesses acrosstheir capital planning processes. The Board of Governors issued a conditional non-objection to Bank of America Corporation and is requiring the BHC to correct weaknesses in some elements of its capital planning process and to resubmit a capital plan by September 30, 2015. (For the results of CCAR 2015, including the Board's decision on each BHC's capital plan, see the Summary of Results section.)
| Actual 2014:Q3 | Minimum stressed ratios with original planned capital actions | Minimum stressed ratios with adjusted planned capital actions | |||
|---|---|---|---|---|---|
| 2014:Q4 | 2015-16 | 2014:Q4 | 2015-16 | ||
| Tier 1 common ratio (%) | 11.9 | 9.7 | 7.0 | 9.7 | 7.1 |
| Common equity tier 1 ratio (%) | n.a. | n.a. | 6.5 | n.a. | 6.6 |
| Tier 1 capital ratio (%) | 13.5 | 11.8 | 7.6 | 11.8 | 7.7 |
| Total risk-based capital ratio (%) | 16.2 | 14.6 | 10.2 | 14.6 | 10.3 |
| Tier 1 leverage ratio (%) | 8.8 | 7.5 | 5.2 | 7.5 | 5.3 |
Note: These projections represent hypothetical estimates that involve an economic outcome that is more adverse than expected. These estimates are not forecasts of capital ratios. The table includes the minimum ratios assuming the capital actions originally submitted in January 2015 by the BHCs in their annual capital plans and the minimum ratios incorporating any adjustments to capital distributions made by BHCs after reviewing the Federal Reserve's stress test projections and original planned capital distributions for those BHCs that did not make adjustments. The minimum capital ratios are for the period 2014:Q4 to 2016:Q4 and do not necessarily occur in the same quarter.
The tier 1 common ratio is calculated using the definitions of tier 1 capital and total risk-weighted assets in 12 CFR part 225, appendixes A and E. All other ratios are calculated in accordance with the transition arrangements provided in the Board's revised capital framework.
n.a. Not applicable.
Source: Federal Reserve estimates in the severely adverse scenario.
| Actual 2014:Q3 | Minimum stressed ratios with original planned capital actions | Minimum stressed ratios with adjusted planned capital actions | |||
|---|---|---|---|---|---|
| 2014:Q4 | 2015-16 | 2014:Q4 | 2015-16 | ||
| Tier 1 common ratio (%) | 11.9 | 11.0 | 10.2 | 11.0 | 10.3 |
| Common equity tier 1 ratio (%) | n.a. | n.a. | 8.5 | n.a. | 8.6 |
| Tier 1 capital ratio (%) | 13.5 | 12.7 | 9.8 | 12.7 | 9.9 |
| Total risk-based capital ratio (%) | 16.2 | 15.5 | 12.2 | 15.5 | 12.3 |
| Tier 1 leverage ratio (%) | 8.8 | 8.0 | 6.7 | 8.0 | 6.7 |
Note: These projections represent hypothetical estimates that involve an economic outcome that is more adverse than expected. These estimates are not forecasts of capital ratios. The table includes the minimum ratios assuming the capital actions originally submitted in January 2015 by the BHCs in their annual capital plans and the minimum ratios incorporating any adjustments to capital distributions made by BHCs after reviewing the Federal Reserve's stress test projections and original planned capital distributions for those BHCs that did not make adjustments. The minimum capital ratios are for the period 2014:Q4 to 2016:Q4 and do not necessarily occur in the same quarter.
The tier 1 common ratio is calculated using the definitions of tier 1 capital and total risk-weighted assets in 12 CFR part 225, appendixes A and E. All other ratios are calculated in accordance with the transition arrangements provided in the Board's revised capital framework.
n.a. Not applicable.
Source: Federal Reserve estimates in the adverse scenario.
References
2. Daniel K. Tarullo (2014), "Stress Testing after Five Years," speech delivered at the Federal Reserve Third Annual Stress Test Modeling Symposium, Boston, June 25, www.federalreserve.gov/newsevents/speech/tarullo20140625a.htm. Return to text
3. 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. The firms in CCAR 2015 overseen by the LISCC are: Bank of America Corporation; The Bank of New York Mellon Corporation; Citigroup Inc.; Deutsche Bank (Deutsche Bank Trust Corporation); The Goldman Sachs Group, Inc.; JPMorgan Chase & Co.; Morgan Stanley; State Street Corporation; and Wells Fargo & Company. See www.federalreserve.gov/bankinforeg/large-institution-supervision.htm for further information. Return to text
