Comprehensive Capital Analysis and Review 2016: Assessment Framework and Results
PrintExecutive Summary
Large bank holding companies have more than doubled their capital levels since the recent financial crisis, in part because of supervisory programs like 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 operations and to lend to 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 also revealed that sudden actual or expected erosions of capital can lead to loss of investor or counterparty confidence in the financial strength of a systemically important BHC, which 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 post-stress analysis of capital adequacy 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 and capital planning processes of large 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 practices to identify, measure, and manage their material risks; 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 can also 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 capital adequacy and overall financial condition.
This report provides
- background on the CCAR requirements;
- a description of the Federal Reserve's assessment framework used and factors considered in reviewing BHCs' capital plans;
- a summary of CCAR 2016 results, including the Federal Reserve's objection and non-objection decisions on BHC's 2016 capital plans; and
- information about the process and requirements of CCAR 2016, including the consequences for 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 33 firms in CCAR from 2009 through the first quarter of 2016.1 This ratio has more than doubled from 5.5 percent in the first quarter of 2009 to 12.2 percent in the first quarter of 2016. That gain reflects a total increase of more than $700 billion in common equity capital from the beginning of 2009 among these BHCs, bringing their total common equity capital to over $1.2 trillion in the first quarter of 2016. The decline in the common equity ratio in the first quarter of 2015 resulted from the incorporation of Basel III standardized risk-weighted assets, which had a one-time effect of reducing all risk-based capital ratios. However, the aggregate common equity capital ratio of the 33 firms increased by 70 basis points between the first quarter of 2015 and the fourth quarter of 2015. Previously risk-weighted assets were calculated under the Basel I general approach.
Common equity capital is expected to continue to increase, as 31 of the 33 BHCs participating in CCAR 2016 have estimated that their common equity will increase between the third quarter of 2016 and the second quarter of 2017, based on their planned capital actions and net income projections under their baseline scenario.
The 33 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 level 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.
1. The Federal Reserve's evaluation of a BHC's common equity capital was initially measured using a tier 1 common capital ratio but now is evaluated using 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) were used. From 2015 to present, common equity tier 1 capital was used for all firms. Under both measures, BHCs have significantly increased their capital position since 2009. Not all of the 33 firms participating in CCAR 2016 reported data for all periods since 2009.Return to text
Return to textOverview of Aggregate Results
The Federal Reserve observes that, on balance, capital planning processes at most of the BHCs participating in CCAR have strengthened since last year. Large and non-complex CCAR firms have generally made steady progress, with most of the firms either meeting or close to meeting supervisory expectations.3 While most Large Institution Supervision Coordination Committee (LISCC) and other large and complex firms have also made progress since CCAR 2015, many continue to fall short of meeting the higher supervisory expectations the Federal Reserve set forth for those firms.4 (For further information, see the Qualitative Assessment Results section.)
In the supervisory post-stress capital assessment, the Federal Reserve estimates that the aggregate common equity tier 1 ratio for the 33 BHCs participating in CCAR would decline in the severely adverse scenario from 12.3 in the fourth quarter of 2015 (the starting point for the exercise) to 7.1 at its minimum point over the planning horizon. This post-stress common equity tier 1 ratio is 1.6 percentage points higher than the BHCs' aggregate common equity tier 1 ratio in the first quarter of 2009. (See tables 1 and 2 for more on the aggregate post-stress capital ratios for the 33 bank holding companies that participated in CCAR 2016.)
The Federal Reserve did not object to the capital plan and planned capital distribution for 31 of the 33 BHCs. The Federal Reserve objected to the capital plans of Deutsche Bank Trust Corporation and Santander Holdings USA, Inc. because of broad and substantial weaknesses across their capital planning processes, and insufficient progress these firms have made toward correcting those weaknesses and meeting supervisory expectations. The Board of Governors issued a conditional non-objection to Morgan Stanley and is requiring the BHC to address weaknesses observed in the firm's capital planning process and to resubmit a capital plan by December 29, 2016. (For the results of CCAR 2016, including the Board's decision on each BHC's capital plan, see the Summary of Results section.)
| Regulatory ratio | Actual 2015:Q4 | Projected minimum stressed ratios | |
|---|---|---|---|
| Original planned capital actions | Adjusted planned capital actions | ||
| Common equity tier 1 capital ratio | 12.3 | 7.1 | 7.1 |
| Tier 1 capital ratio | 13.5 | 8.6 | 8.6 |
| Total capital ratio | 16.2 | 11.4 | 11.4 |
| Tier 1 leverage ratio | 9.2 | 5.9 | 5.9 |
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 tables include the minimum ratios assuming the capital actions originally submitted in April 2016 by the bank holding companies in their annual capital plans and the minimum ratios incorporating any adjustments to capital distributions made by a bank holding company after reviewing the Federal Reserve's stress test. The minimum capital ratios are for the period 2016:Q1 to 2018:Q1 and do not necessarily occur in the same quarter.
Source: Federal Reserve estimates in the severely adverse scenario.
| Regulatory ratio | Actual 2015:Q4 | Projected minimum stressed ratios | |
|---|---|---|---|
| Original planned capital actions | Adjusted planned capital actions | ||
| Common equity tier 1 capital ratio | 12.3 | 9.2 | 9.2 |
| Tier 1 capital ratio | 13.5 | 10.7 | 10.7 |
| Total capital ratio | 16.2 | 13.1 | 13.1 |
| Tier 1 leverage ratio | 9.2 | 7.3 | 7.3 |
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 tables include the minimum ratios assuming the capital actions originally submitted in April 2016 by the bank holding companies in their annual capital plans and the minimum ratios incorporating any adjustments to capital distributions made by a bank holding company after reviewing the Federal Reserve's stress test. The minimum capital ratios are for the period 2016:Q1 to 2018:Q1 and do not necessarily occur in the same quarter.
Source: Federal Reserve estimates in the adverse scenario.
References
3. Large and noncomplex firms are U.S. BHCs and intermediate holding companies (IHCs) of foreign banking organizations (FBOs) that have total consolidated assets of at least $50 billion but less than $250 billion, have consolidated total on-balance sheet foreign exposure of less than $10 billion, and are not otherwise subject to the Federal Reserve's Large Institution Supervision Coordination Committee (LISCC) framework. Return to text
4. Large and complex firms are U.S. BHCs and IHCs of FBOs that have total consolidated assets of $250 billion or more or consolidated total on-balance sheet foreign exposure of $10 billion or more. Return to text
