Comprehensive Capital Analysis and Review 2014: Assessment Framework
and Results
Print- Capital Plan Assessment Factors
- Resubmissions and Feedback
- Appendix: Disclosure Tables
Capital Plan Assessment Factors
To support its assessment of the capital plans, the Federal Reserve reviews the supporting analyses in a BHC's capital plan, including the BHC's own stress test results, and uses the results of the supervisory stress test conducted under the Board's Dodd-Frank Act stress test rules as the basis for the quantitative analysis.
Qualitative Assessments
Qualitative assessments are a critical component of the CCAR review.20 Even if a BHC meets required capital ratios, the Federal Reserve could nonetheless object to that BHC's capital plan for other reasons. As described in the Board's capital plan rule, the reasons for an objection on qualitative grounds could include any of the following:
- The BHC's capital-adequacy assessment process--including the corporate governance and controls around the process, as well as risk-identification, risk-measurement, and risk-management practices supporting the process--are not sufficiently robust.
- The assumptions and analyses underlying the BHC's capital plan are inadequate.
- A BHC's capital adequacy process or proposed capital distributions would 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.
- There are outstanding material, unresolved supervisory issues.21
During CCAR, the Federal Reserve evaluates each BHC's risk-identification, risk-measurement, and risk-management practices supporting the capital planning process, including estimation practices used to produce stressed loss, revenue, and capital ratios, as well as the governance and controls around these practices. In conducting the qualitative assessment, supervisors focus in particular on the internal practices a BHC uses in its internal determination of the amount and composition of capital needed to continue operations under a stressful environment.
The Federal Reserve expects BHCs to effectively capture BHC-specific factors in their internal capital planning processes, modeling practices, and scenario development. Accordingly, the Federal Reserve's qualitative assessment of the capital plans focused on the robustness of a BHC's internal capital adequacy processes, including each BHC's stress test under its own internally designed stress scenario. Particular attention was given to the processes surrounding the development and implementation of the BHC stress scenario to ensure that these processes are robust and capture firm-specific vulnerabilities and risks, and that the translation of the scenario into loss, revenue, and capital projections was sound in both concept and implementation. There was also an assessment of whether the broader capital planning process is overseen by a robust governance process and is conducted in a well-controlled manner.
Quantitative Assessment
As noted above, in CCAR, each BHC is required in its capital plan to demonstrate that it can maintain a tier 1 common ratio greater than 5 percent and capital ratios above the minimum regulatory requirements in effect during each quarter of the planning horizon under stressed economic and financial market conditions.22 The Federal Reserve's assessment of this requirement is based on post-stress capital analysis generated by the BHCs, as well as on supervisory post-stress capital analysis.
The CCAR post-stress capital analysis measures the resiliency of each BHC's current capital and the assumed path of its capital actions to potential changes in the economic and financial market environment.23 Thus, the Federal Reserve evaluates a BHC's nine-quarter, post-stress capital ratio using supervisory projections under severely adverse and adverse scenarios combined with the path of the BHC's capital actions included in its capital plan under its BHC baseline scenario. In reality, BHCs would be expected to reduce distributions, especially share repurchases, under stressful conditions. However, the goal of the CCAR post-stress capital analysis is to provide a rigorous test of a BHC's health even if the economy deteriorated and the BHC continued to make its planned capital distributions.
The CCAR post-stress capital analysis arrives at projected capital levels and ratios by combining each BHC's planned capital actions with the estimates of revenues, losses, and expenses from the Federal Reserve's supervisory stress test conducted under the Dodd-Frank Act.24 (For a comparison of the Dodd-Frank Act stress tests and CCAR, see box 3). As described in the overview of methodology for the Dodd-Frank Act supervisory stress tests published on March 20, 2014, the Federal Reserve makes projections over the nine-quarter planning horizon, using input data provided by the 30 BHCs and a set of models developed or selected by the Federal Reserve.25 This year, the supervisory stress test included certain new elements, most notably, independent projections of balances and risk-weighted assets and the incorporation of certain capital calculation changes from the revised regulatory capital framework (including projections of accumulated other comprehensive income). The supervisory projections of pre-provision net revenue also incorporated an assumption that the elevated litigation risk and the associated increase in legal reserves observed in recent years will continue under supervisory scenarios.
The supervisory projections of losses, revenues, and expenses are based on hypothetical, severely adverse and adverse macroeconomic and financial market scenarios developed by the Federal Reserve. This year, the severely adverse scenario is characterized by a substantial weakening in economic activity across all of the economies included in the scenario. In addition, the scenario features a significant reversal of recent improvements to the U.S. housing market and the euro area outlook. The adverse scenario is characterized by a weakening in economic activity across all of the economies included in the scenario combined with a global aversion to long-term fixed-income assets that brings about rapid rises in long-term rates and steepening yield curves in the United States and the four countries/country blocks. As noted earlier, eight BHCs with substantial trading, private equity, derivatives, and custodial activities were subject to additional scenario components in the supervisory severely adverse and supervisory adverse scenarios.
In CCAR 2014, the Federal Reserve also assessed each BHC's plans for meeting the revised regulatory capital rule requirements approved by the Board in July 2013. All 30 BHCs demonstrated the ability to successfully meet the fully phased-in capital requirements of the revised capital framework by no later than the end of 2015 under the supervisory baseline scenario.
Each BHC's own stress test analysis was expected to encompass all potential losses and other impacts to net income that the BHC might experience under each of the three supervisory scenarios, as well as under baseline and stress scenarios developed by the BHC.
The Federal Reserve may object to the capital plan of any BHC with post-stress capital ratios below the minimum requirements. Both the BHC's internal stress test results and the Federal Reserve's CCAR post-stress capital analysis are critical parts of the Federal Reserve's determination as to whether to object or not object to a capital plan; however, they are not the only consideration and not in all cases the most important consideration in this determination. For example, a BHC could have stressed capital ratios that remain well above regulatory minimum levels, and the Federal Reserve could still object to its capital plan and, thus, to the planned capital distributions in the plan, based on qualitative factors.
For some BHCs, the Federal Reserve may require, as a condition of its non-objection to a capital plan, that the BHCs remediate certain weaknesses in their capital plans and capital planning processes identified during CCAR 2014, and resubmit their capital plans.
Box 3. Dodd-Frank Act Supervisory Stress Tests and the CCAR Post-Stress Capital Analysis
While closely related, there are some important differences between the Dodd-Frank Act supervisory stress tests and the CCAR post-stress capital analysis. The Dodd-Frank Act supervisory stress tests and the CCAR quantitative assessment incorporate the same projections of pre-tax net income. The primary difference between the Dodd-Frank Act supervisory stress tests and the CCAR quantitative assessment is the capital action assumptions that are combined with these projections to estimate post-stress capital levels and ratios.
Capital Action Assumptions for the Dodd-Frank Act Supervisory Stress Tests
To project post-stress capital ratios for the Dodd-Frank Act supervisory stress tests, the Federal Reserve uses a standardized set of capital action assumptions that are specified in the Dodd-Frank Act stress test rules.1 Common stock dividend payments are assumed to continue at the same level as the previous year. Scheduled dividend, interest, or principal payments on any other capital instrument eligible for inclusion in the numerator of a regulatory capital ratio are assumed to be paid. The assumptions are that repurchases of common stock are zero. The capital action assumptions do not include issuance of new common stock, preferred stock, or other instruments that would be included in regulatory capital, except for common stock issuance associated with expensed employee compensation.2
Capital Actions for CCAR
In contrast, for the CCAR post-stress capital analysis, the Federal Reserve uses BHCs' planned capital actions, and assesses whether a BHC would be capable of meeting supervisory expectations for minimum capital ratios even if stressful conditions emerged and the BHC did not reduce planned capital distributions.
As a result, post-stress capital ratios projected for the Dodd-Frank Act supervisory stress tests often differ significantly from those for the CCAR post-stress capital analysis. For example, if a BHC includes a dividend cut in its planned capital actions, its post-stress capital ratios projected for the CCAR capital analysis could be higher than those projected for the Dodd-Frank Act supervisory stress tests. Conversely, if a BHC includes significant dividend increases, repurchases, or other actions that deplete capital in its planned capital actions, the post-stress capital ratios for the CCAR could be lower.
1. To make the results of its supervisory stress test comparable to the company-run stress tests, the Federal Reserve uses the same capital action assumptions as those required for the company-run stress tests, outlined in the Dodd-Frank Act stress test rules. See 12 CFR 252.56(b)(2).Return to text
2. The Dodd-Frank Act stress test rule for covered companies assumes that future capital actions that are subject to future adjustment, market conditions, or other regulatory approvals will not be reflected in a company's projected regulatory capital for the purpose of the company-run stress tests because of the uncertainty of these actions. Thus, it was assumed that BHCs do not make repurchases, redeem, or issue any new common stock, preferred stock, or other instrument that would be included in regulatory capital in the second through ninth quarters of the planning horizon, except for common stock issuances associated with expensed employee compensation. See 12 CFR 252.56(b)(2).Return to text
Return to textReferences
20. For more on Federal Reserve expectations for capital planning at CCAR BHCs, see Board of Governors of the Federal Reserve System (2013), Capital Planning at Large Bank Holding Companies: Supervisory Expectations and Current Range of Practice (Washington: Board of Governors, August 19), www.federalreserve.gov/bankinforeg/bcreg20130819a1.pdf. Return to text
21. See 12 CFR 225.8(e)(2)(ii). In determining whether a capital plan or any proposed capital distribution would constitute an unsafe or unsound practice, the Board or the appropriate Reserve Bank would consider whether the BHC is and would remain in sound financial condition after effecting the capital plan and all proposed capital distributions. 12 CFR 225.8(e)(2)(ii)(D). Return to text
22. Common equity tier 1 capital includes common stock instruments and related surplus, retained earnings, accumulated other comprehensive income (AOCI), and limited amounts of common equity tier 1 minority interest, minus applicable regulatory adjustments and deductions. Items that are fully deducted from common equity tier 1 capital include goodwill, other intangible assets (excluding mortgage servicing assets) and certain deferred tax assets; items that are subject to limits in common equity tier 1 capital include mortgage servicing assets, eligible deferred tax assets, and certain significant investments. See 12 CFR part 225, appendix A; 12 CFR 217. 20(b), 217.22(a), and 217.22(d). Tier 1 capital consists of common equity tier 1 capital and additional tier 1 capital, which includes additional tier 1 capital instruments (including qualifying non-cumulative perpetual preferred stock instruments), related surplus, and limited amounts of tier 1 minority interest, minus applicable regulatory adjustments and deductions. See 12 CFR part 225, appendix A; 12 CFR 217.2 and 217.20(c). Total capital consists of tier 1 and tier 2 capital, which includes tier 2 capital instruments (including qualifying subordinated debt instruments), related surplus, and limited amounts of total capital minority interest and the allowance for loan and lease losses. See 12 CFR 217.2 and 217.20(d). Tier 1 common capital is calculated as tier 1 capital less the non-common elements of tier 1 capital, including non-cumulative perpetual preferred stock and related surplus, and minority interest in subsidiaries. In CCAR 2014, tier 1 common is calculated under the definition of capital in effect as of the beginning of the stress test and capital plan cycle in 2013. See 12 CFR 225.8(c)(8); 12 CFR part 225, appendix A. Return to text
23. For more on the methodology of the Federal Reserve's supervisory stress test, see Board of Governors of the Federal Reserve Board (2014), "Dodd-Frank Act Stress Test 2014: Supervisory Stress Test Methodology and Results" (Washington: Board of Governors, March 24), www.federalreserve.gov/newsevents/press/bcreg/bcreg20140320a1.pdf. Return to text
24. 12 CFR 252.44. Return to text
25. In connection with CCAR 2014, and in addition to the models developed and data collected by the Federal Reserve, the Federal Reserve used proprietary models or data licensed from certain third-party providers. These providers are identified in appendix B: Models to Project Net Income and Stressed Capital of Board of Governors of the Federal Reserve Board (2014), "Dodd-Frank Act Stress Test 2014: Supervisory Stress Test Methodology and Results," (Washington: Board of Governors, March 24), www.federalreserve.gov/newsevents/press/bcreg/bcreg20140320a1.pdf (see page 65, footnote 43). Return to text
