Executive Summary
Large financial institutions have more than doubled their capital levels since the 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 firm's ability to absorb losses and continue operating and lending to creditworthy businesses and consumers. The crisis illustrated that confidence in the capitalization and overall financial strength of a financial institution can erode rapidly in the face of changes in current or expected economic and financial conditions. More importantly, the crisis revealed that sudden actual or expected erosions of capital can lead to loss of investor and counterparty confidence in the financial strength of a systemically important financial institution, which may not only imperil that institution's viability, but also harm 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 financial institutions.
The Federal Reserve's annual CCAR exercise is an intensive assessment of the capital adequacy and capital planning practices of large U.S. financial institutions. Prior to this year, all firms involved in the assessment could receive an objection to their capital plans based on either quantitative or qualitative grounds. As noted, the Board recently amended its rules to remove large and noncomplex firms from the qualitative assessment of CCAR effective for this year's exercise. Large and noncomplex firms are still required to demonstrate an ability to meet their minimum capital requirements under stress as part of CCAR's quantitative assessment and will continue to be subject to regular supervisory assessments that examine their capital planning practices.5 BHCs that are LISCC or large and complex firms continue to be subject to both the qualitative and quantitative assessment process of CCAR.6
The quantitative assessment helps to ensure that firms maintain sufficient capital to continue operations throughout times of economic and financial market stress. The horizontal nature of the assessment offers insights into the condition of the U.S. financial system, including whether firms are sufficiently resilient to continue to lend to households and businesses under such adverse conditions. The CCAR process can also act as a counterweight to pressures that a firm may face to use capital distributions to signal financial strength, even when facing a deteriorating or highly stressful environment.
The qualitative assessment seeks to ensure that firms have strong practices for assessing their capital needs that are supported by: effective firmwide identification, measurement, and management of their material risks; strong internal controls; and effective oversight by senior management and boards of directors. By focusing on the key elements of capital planning, the qualitative assessment helps promote better risk management and greater resiliency at the firms. Each firm must support its capital planning decisions with a forward-looking, comprehensive analysis that takes into account the firm's unique risk profile and activities as well as the effect of highly stressful operating environments on its financial condition.
The results of the qualitative assessment serve as inputs into other aspects of the Federal Reserve's supervisory program for the largest U.S. financial institutions and factor into supervisory assessments of each firm's risk management, corporate governance, and internal controls processes. Information gathered through the qualitative assessment also serves as an input into evaluations of a firm's capital adequacy and overall financial condition.
This report provides
- background on the CCAR requirements;
- descriptions of the assessment framework and summary of results for the quantitative assessment;
- newly enhanced descriptions of the assessment framework, process, historical deficiencies, and summary of results for the qualitative assessment; and,
- information about the process and requirements of CCAR 2017, 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 firm's capital plan.
Box 1. Overview of Trends in Capital Levels
Figure A provides the aggregate ratio of common equity capital to risk-weighted assets for the firms in CCAR from 2009 through the fourth quarter of 2016.1 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 2016. That gain reflects a total increase of more than $750 billion in common equity capital from the beginning of 2009 among these firms, bringing their total common equity capital to over $1.2 trillion in the fourth quarter of 2016. The decline in the common equity ratio in the first quarter of 2015 resulted from the incorporation of risk-weighted assets calculated under the standardized approach under the capital rules that the Board adopted in 2013, which had a one-time effect of reducing all risk-based capital ratios. However, the aggregate common equity capital ratio of the 34 firms increased by around 65 basis points between the first quarter of 2015 and the fourth quarter of 2015. Previously, risk-weighted assets were calculated under a prior version of the capital rules.
Figure A. Aggregate common equity capital ratio of CCAR 2017 Firms
Source: FR Y-9C.
In the aggregate, the 34 firms participating in CCAR 2017 have estimated that their common equity will remain near current levels between the third quarter of 2017 and the second quarter of 2018, based on their planned capital actions and net income projections under their baseline scenario.
These 34 firms hold more than 75 percent of the total assets of all U.S. financial companies.2 The financial crisis revealed that both the level and quality of capital contribute to a firm's ability to continue operating under adverse conditions. In part through programs like CCAR, the quantity and quality of capital held by these firms has improved, increasing the resilience of the banking sector and strengthening the financial system more broadly.
1. The Federal Reserve's evaluation of a firm'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 firms. In 2014, both tier 1 common capital (for non-advanced approaches firms) and common equity tier 1 capital (for advanced approaches firms) were used. From 2015 to present, common equity tier 1 capital was used for all firms. Under both measures, firms have significantly increased their capital position since 2009. Not all of the 34 firms participating in CCAR 2017 reported data for all periods since 2009. Return to text
2. To calculate total assets of U.S. financial companies, this figure uses information from all firms that file the FR Y-9C, including domestic BHCs, IHCs, savings and loan holding companies and securities holding companies. Return to text
Return to textOverview of Aggregate Results
Quantitative Assessment
In the supervisory post-stress capital assessment, the Federal Reserve estimates that the aggregate common equity tier 1 ratio for the firms participating in CCAR 2017 would decline in the severely adverse scenario from 12.5 percent in the fourth quarter of 2016 (the starting point for the exercise) to 7.2 percent at its minimum point over the planning horizon. This post-stress common equity tier 1 ratio is 1.7 percentage points higher than the firms' aggregate common equity tier 1 ratio in the first quarter of 2009. (See table 1 and 2 for more on the aggregate post-stress capital ratios for the firms that participated in CCAR 2017.)
Qualitative Assessment
The Federal Reserve observes that, on balance, most of the 13 firms participating in the CCAR 2017 qualitative assessment have continued to strengthen their capital planning practices since last year. However, these firms continue to have areas of weaknesses that fall short of meeting supervisory expectations for capital planning. The Federal Reserve has allowed time for firms to work toward full achievement of our capital planning expectations and as such, expects firms to continue to make steady progress. (For further information, see the Qualitative Assessment Framework, Process, and Summary of Results section.)
Capital Plan Decisions
The Federal Reserve did not object to any of the capital plans or planned capital distributions for the firms participating in CCAR 2017. The Board of Governors issued a conditional non-objection to Capital One Financial Corporation (Capital One) and is requiring the firm to address weaknesses observed in the firm's capital planning practices and to resubmit a capital plan by December 28, 2017. The Board's decision on each firm's capital plan is presented in table 3.
Table 1. Projected minimum regulatory capital ratios under the severely adverse scenario, 2017:Q1 to 2019:Q1: 34 participating firms
Percent
| Regulatory ratio | Actual 2016:Q4 |
Projected minimum stressed ratios | |
|---|---|---|---|
| Original planned capital actions | Adjusted planned capital actions | ||
| Common equity tier 1 capital ratio | 12.5 | 7.2 | 7.2 |
| Tier 1 capital ratio | 13.9 | 8.7 | 8.7 |
| Total capital ratio | 16.5 | 11.3 | 11.3 |
| Tier 1 leverage ratio | 9.2 | 5.7 | 5.7 |
| Supplementary leverage ratio | n/a | 4.4 | 4.4 |
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 2017 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, other than for the supplementary leverage ratio, are for the period 2017:Q1 to 2019:Q1. The minimum supplementary leverage ratio is for the period 2018:Q1 to 2019:Q1. The minimum capital ratios do not necessarily occur in the same quarter. Supplementary leverage ratio projections only include estimates for firms subject to advanced approaches.
n/a Not applicable.
Source: Federal Reserve estimates in the severely adverse scenario.
Table 2. Projected minimum regulatory capital ratios under the adverse scenario, 2017:Q1 to 2019:Q1: 34 participating firms
Percent
| Regulatory ratio | Actual 2016:Q4 |
Projected minimum stressed ratios | |
|---|---|---|---|
| Original planned capital actions | Adjusted planned capital actions | ||
| Common equity tier 1 capital ratio | 12.5 | 9.2 | 9.2 |
| Tier 1 capital ratio | 13.9 | 10.6 | 10.6 |
| Total capital ratio | 16.5 | 12.9 | 12.9 |
| Tier 1 leverage ratio | 9.2 | 6.9 | 6.9 |
| Supplementary leverage ratio | n/a | 5.3 | 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 tables include the minimum ratios assuming the capital actions originally submitted in April 2017 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, other than for the supplementary leverage ratio, are for the period 2017:Q1 to 2019:Q1. The minimum supplementary leverage ratio is for the period 2018:Q1 to 2019:Q1. The minimum capital ratios do not necessarily occur in the same quarter. Supplementary leverage ratio projections only include estimates for firms subject to advanced approaches.
n/a Not applicable.
Source: Federal Reserve estimates in the adverse scenario.
Table 3. Summary of the Federal Reserve's actions on capital plans in CCAR 2017
| Non-objection to capital plan | Conditional non-objection to capital plan | Objection to capital plan |
|---|---|---|
| Ally Financial Inc. | Capital One Financial Corporation | |
| American Express Company | ||
| BancWest Corporation | ||
| Bank of America Corporation | ||
| The Bank of New York Mellon Corporation | ||
| BB&T Corporation | ||
| BBVA Compass Bancshares, Inc. | ||
| BMO Financial Corp. | ||
| CIT Group Inc. | ||
| Citigroup Inc. | ||
| Citizens Financial Group, Inc. | ||
| Comerica Incorporated | ||
| Deutsche Bank Trust Corporation | ||
| Discover Financial Services | ||
| Fifth Third Bancorp | ||
| The Goldman Sachs Group, Inc. | ||
| HSBC North America Holdings Inc. | ||
| Huntington Bancshares Incorporated | ||
| JPMorgan Chase & Co. | ||
| KeyCorp | ||
| M&T Bank Corporation | ||
| Morgan Stanley | ||
| MUFG Americas Holdings Corporation | ||
| Northern Trust Corporation | ||
| The PNC Financial Services Group, Inc. | ||
| Regions Financial Corporation | ||
| Santander Holdings USA, Inc. | ||
| State Street Corporation | ||
| SunTrust Banks, Inc. | ||
| TD Group US Holdings LLC | ||
| U.S. Bancorp | ||
| Wells Fargo & Company | ||
| Zions Bancorporation |
References
5. The large and noncomplex firms subject only to a quantitative objection in CCAR 2017 are: Ally Financial Inc.; American Express Company; BancWest Corporation; BB&T Corporation; BBVA Compass Bancshares, Inc.; BMO Financial Corp.; CIT Group Inc.; Citizens Financial Group, Inc.; Comerica Incorporated; Discover Financial Services; Fifth Third Bancorp; Huntington Bancshares Incorporated; KeyCorp; M&T Bank Corporation; MUFG Americas Holdings Corporation; Northern Trust Corporation; Regions Financial Corporation; Santander Holdings USA, Inc.; SunTrust Banks, Inc.; and Zions Bancorporation. Return to text
6. The LISCC and large and complex firms participating in CCAR 2017 are: Bank of America Corporation; The Bank of New York Mellon Corporation; Capital One Financial Corporation; Citigroup Inc.; The Goldman Sachs Group, Inc.; HSBC North America Holdings Inc.; JPMorgan Chase & Co.; Morgan Stanley; The PNC Financial Services Group, Inc.; State Street Corporation; TD Group US Holdings LLC; U.S. Bancorp; and Wells Fargo & Company. Certain LISCC or large and complex firms that recently formed U.S. IHCs did not participate in CCAR 2017. The firms, however, were required under the capital plan rule to submit a capital plan to the Federal Reserve that was subject to a confidential review process. These firms are Barclays US LLC; Credit Suisse Holdings (USA), Inc.; Deutsche Bank USA Corporation; RBC USA Holdco Corporation; and UBS Americas Holdings LLC. Deutsche Bank Trust Corporation is a subsidiary of a newly formed IHC, which has participated in CCAR in previous years and will be subject to the quantitative assessment in CCAR. Return to text