Comprehensive Capital Analysis and Review 2016 Summary Instructions
PrintFederal Reserve Assessment of BHC Capital Plans
The Federal Reserve will review the supporting information in a BHC's capital plan--including the BHC's own stress test results--and will generate supervisory stress test estimates, using internally developed supervisory models and assumptions wherever possible.39
Difference in Supervisory Expectations for Firms Based on Size and Complexity
As described in SR letters 15-18 and 15-19, the Federal Reserve's expectations for capital planning and capital adequacy processes for a firm are based upon the size, scope of operations, activities, and systemic importance of the firm. In particular, the Federal Reserve has significantly heightened expectations for the largest, most complex BHCs and expects them to have the most sophisticated, comprehensive, and robust capital planning processes.
Qualitative Assessments
In this Section:
The Federal Reserve can object to a BHC's capital plan based on its qualitative assessment. The reasons for a qualitative objection 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 planning process are not reasonable or appropriate.
- The CCAR assessment results in a determination that a BHC's capital planning 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.40
In assessing the assumptions and analysis underlying a BHC's capital plan and the BHC's methodologies for reviewing the robustness of its capital planning process, the Federal Reserve's qualitative assessment places particular emphasis on the following six areas of a firm's capital planning, as outlined in SR letters 15-18 and 15-19: governance, risk management, internal controls, capital policies, scenario design, and projection methodologies.41 BHCs should refer to SR letter 15-18 or 15-19, as relevant, for detailed guidance on the Federal Reserve's expectations for these areas of capital planning.
If the Federal Reserve identifies substantial weaknesses in a BHC's capital planning process, or in key aspects of the risk-management and internal controls processes that support capital planning, that finding could result in 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 planning process.
Integration of CCAR into Year-Round Supervision
The Federal Reserve has taken steps to integrate CCAR into ongoing supervisory activities conducted throughout the year. Certain supervisory activities that are conducted throughout the year assess the BHC's practices and processes that are used, in part, to support its capital planning, including reviews that look at risk management, internal controls, audit, and corporate governance. Reviews of these areas inform the annual CCAR qualitative assessment. The integration also allows the Federal Reserve to consistently incorporate supervisory issues identified across the full range of examination work conducted throughout the year into the overall qualitative assessment. In turn, the CCAR qualitative assessment helps to highlight key weaknesses in a BHC's internal process that can result in additional supervisory scrutiny more broadly.
Throughout the year, specialist examiners closely monitor a BHC's progress toward meeting supervisory expectations, which provides additional information to support the CCAR qualitative assessment. The integration of the annual qualitative review into the year-round program allows the Federal Reserve to better assess the progress and quality of BHCs' efforts to address identified weaknesses in all capital planning-related practices. In turn, BHCs' progress toward meeting supervisory expectations is an important element of the CCAR qualitative assessment.
Quantitative Assessments
In this Section:
The quantitative assessments that the Federal Reserve undertakes in CCAR are summarized in figure 1.
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
The Federal Reserve's supervisory post-stress capital analysis is based on the estimates of losses, revenues, balances, risk-weighted assets, and capital from the Federal Reserve's supervisory stress test conducted under the Dodd-Frank Act.42 The supervisory projections are conducted under three hypothetical macroeconomic and financial market scenarios developed by the Federal Reserve: the supervisory baseline, supervisory adverse, and supervisory severely adverse scenarios.
The CCAR post-stress capital analysis uses the same data, models, and assumptions as supervisory stress testing conducted in accordance with the Dodd-Frank Act requirements, except that the CCAR analysis involves the BHCs' planned capital actions in the BHC baseline scenario rather than the capital action assumptions that are required in the stress testing rules. The CCAR analysis helps 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) throughout the planning horizon, even if adverse or severely adverse stress conditions emerged and the BHC did not reduce planned capital distributions.43
In connection with Dodd-Frank Act supervisory stress testing and the annual CCAR exercise, the Federal Reserve will use the data and information provided in the FR Y-14 regulatory reports as of December 31, 2015 (except for trading and counterparty data). BHCs should review the instructions for 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 March 31, 2016.
- Missing data or data deficiency: If a BHC's submitted data quality is deemed too deficient to produce a 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) to the portfolio balances based on supervisory projections of 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 reported by BHC 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.
- Assets and liabilities acquired in material business plan changes: The Federal Reserve does not apply the missing data treatment, described above, to assets and liabilities that are expected to be acquired in a material business plan change during the planning horizon. Rather, the Federal Reserve will apply loss and PPNR estimates appropriate to the acquisition assets, liabilities, and business activities based on the Federal Reserve's assessment of all business plan change-related information submitted by the firm.
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.
The Federal Reserve expects that capital plans will reflect conservative common dividend payout ratios. Specifically, requests 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. In reviewing such requests, one consideration will be the BHC's ability to meet its baseline earnings projections over the planning horizon, including the demonstrated strength of core earnings, effectiveness of baseline earnings projections, and earnings volatility over time.
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 capital distributions (i.e., common stock dividends or repurchases or redemptions of common stock, preferred stock, or other instruments eligible for inclusion in regulatory capital) relative to those initially submitted in the BHC's original capital plan. The Board's final decision to object or not object will be based on the BHC adjusted capital distributions (if any).
As noted above, the Federal Reserve has observed a practice whereby some BHCs have adjusted only the distributions in the out-quarters of the planning horizon--i.e., those that are not subject to objection in the current CCAR exercise. For CCAR 2016, those would be the projected third and fourth quarters of 2017 and first quarter of 2018. In the absence of supporting actions, such as a firm actually cutting distributions in these quarters, this practice erodes the credibility of a BHC's capital plan. Accordingly, to support the credibility of its capital plan, a BHC that makes a one-time adjustment to its planned capital distributions should avoid concentrating the adjustment in the quarters not subject to objection in CCAR 2016 without providing an explanation.
Federal Reserve Responses to Planned Capital Actions
Based on the results of the qualitative and quantitative assessment, the Federal Reserve will determine whether or not to object to a capital plan.
For purposes of CCAR 2016, 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 July 1, 2016, through June 30, 2017, 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 may still authorize the BHC to undertake certain distributions set forth in its capital plan.
The Federal Reserve reserves the authority to object to capital distributions in future quarters or require a resubmitted capital plan 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 completion of the CCAR process, the Federal Reserve will publicly disclose its decision to object or not object to a BHC's capital plan.
The Federal Reserve will include in its CCAR disclosure the results of its post-stress capital analysis for each BHC, including BHC-specific post-stress regulatory capital ratios (tier 1 leverage, common equity tier 1 risk-based, tier 1 risk-based, and total risk-based capital ratios) estimated in the adverse and severely adverse scenarios. These results will be based on the same loss and PPNR estimates derived in the Dodd-Frank Act stress tests, combined with planned capital actions as provided by each BHC 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, as applicable. (See appendix B for the format that will be used to publish these data.) In addition to disclosing a summary of its quantitative assessment of the BHC's capital plans, the Federal Reserve will disclose the reasons for any objections to specific BHCs' capital plans on qualitative grounds. This will include information about weaknesses in a BHC's practices that led to an objection to the BHC's capital plan for qualitative reasons.
In a separate document, the Federal Reserve will disclose the detailed results of supervisory stress tests for each BHC under both the adverse and the severely adverse supervisory scenarios, 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 C for the format that will be used to publish these data.)
The Federal Reserve will publish the CCAR and DFAST results documents by June 30, 2016. BHCs are 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.
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.
Pursuant to the capital plan rule, a BHC must revise 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.44 Further, the Federal Reserve may direct a BHC to revise and resubmit its capital plan for a number of other reasons, including if a stress scenario developed by the BHC is no longer 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.45
Submissions that are late, incomplete, or otherwise unclear could result in an objection to the resubmitted plan. 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
Subject to certain exceptions, the capital plan rule provides that a BHC 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.46 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.47
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.48 As with all formal communications on CCAR-related issues, a BHC should use the CCAR Communications mailbox to submit any requests for capital distributions (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.49 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 planning process, are not reasonable or appropriate.50 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 planning 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, Dodd-Frank Act Stress Test 2015: Supervisory Stress Test Methodology and Results (Washington: Board of Governors, March 2015), www.federalreserve.gov/newsevents/press/bcreg/bcreg20150305a1.pdf. Return to text
40. See 12 CFR 225.8(f)(2)(ii). Return to text
41. See SR letters 15-18 and 15-19. Return to text
42. For more on the methodology of the Federal Reserve's
supervisory stress test, see Board of Governors of the Federal Reserve System, Dodd-Frank Act Stress Test 2015: Supervisory Stress Test Methodology and Results (Washington: Board of Governors, March 5, 2015), www.federalreserve.gov/newsevents/press/bcreg/bcreg20150305a1.pdf. Return to text
43. The Board will not consider the capital conservation buffer distribution limitations in the CCAR 2016 planning horizon when calculating its post-stress capital ratios, and similarly, a BHC should not assume the operation of distribution limitations of the capital conservation buffer when conducting its stress tests. Return to text
44. 12 CFR 225.8(e)(4)(i)(A). Return to text
45. 12 CFR 225.8(e)(4)(i)(B). Return to text
46. BHCs are 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
47. 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 additional 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
48. See 12 CFR 225.8(g) for circumstances under which approval would be required where a BHC had received a non-objection to its capital plan. Return to text
49. See 12 CFR 225.8(g)(4). Return to text
50. 12 CFR 225.8(f)(2)(ii)(B). Return to text
