Board of Governors of the Federal Reserve System

Preface

The Federal Reserve promotes a safe, sound, and stable banking and financial system that supports the growth and stability of the U.S. economy through its supervision of bank holding companies (BHCs), U.S. intermediate holding companies (IHCs), savings and loan holding companies, state member banks, and nonbank financial institutions that the Financial Stability Oversight Council (FSOC) has determined shall be supervised by the Board of Governors of the Federal Reserve System (Board).¹

The Federal Reserve has established frameworks and programs for the supervision of its largest and most complex financial institutions to achieve its supervisory objectives, incorporating the lessons learned from the 2007 to 2009 financial crisis and in the period since. As part of these supervisory frameworks and programs, the Federal Reserve annually assesses whether financial firms with $50 billion or more in total consolidated assets are sufficiently capitalized to absorb losses during stressful conditions, while meeting obligations to creditors and counterparties and continuing to be able to lend to households and businesses. The Federal Reserve's expectations for capital planning practices are tailored to the size, scope of operations, activities, and systemic importance of a particular firm. In particular, the Federal Reserve has significantly heightened expectations for BHCs and U.S. IHCs supervised by the Large Institution Supervision Coordinating Committee (LISCC firms) and large and complex firms.²

This annual assessment includes two related programs:

• Dodd-Frank Act supervisory stress testing is a forward-looking quantitative evaluation of the impact of stressful economic and financial market conditions on BHCs' capital. The supervisory stress test that is carried out pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and the Board's rules³ serves to inform the Federal Reserve, BHCs, and the general public of how institutions' capital ratios might change under a hypothetical set of stressful economic conditions developed by the Federal Reserve.⁴ The supervisory stress test results, after incorporating firms' planned capital actions, are also used for the quantitative assessment in the Comprehensive Capital Analysis and Review (CCAR). All BHCs and U.S. IHCs with $50 billion or more in total consolidated assets are currently subject to Dodd-Frank supervisory stress testing.⁵
• The Comprehensive Capital Analysis and Review (CCAR) consists of a quantitative assessment for all BHCs with $50 billion or more in total consolidated assets and a qualitative assessment for BHCs that are LISCC or large and complex firms. The quantitative assessment evaluates a firm's capital adequacy and planned capital distributions, such as any dividend payments and common stock repurchases. The Federal Reserve assesses whether firms have sufficient capital to continue operating and lending to creditworthy households and businesses throughout times of economic and financial market stress. CCAR also includes a qualitative assessment of capital planning practices at the largest and most complex firms. As part of the qualitative assessment, the Federal Reserve evaluates the reliability of each firm's analyses and other processes for capital planning, focusing on the areas that are most critical to sound capital planning--namely, how a firm identifies, measures, and determines capital needs for its material risks, and a firm's controls and governance around those processes. The Federal Reserve recently further tailored its rules to remove large and noncomplex firms from the qualitative objection process.⁶ At the conclusion of the process, the Federal Reserve either does not object or objects to a firm's capital plan. If the Federal Reserve objects to a firm's capital plan, the firm may only make capital distributions that the Federal Reserve has not objected to in writing.

 

References

 

 1. Information on the Federal Reserve's regulation and supervision function, including more detail on stress testing and capital planning assessment, is available on the Federal Reserve website at www.federalreserve.gov/supervisionreg.htm. Return to text

 2. Large and complex firms are BHCs or U.S. IHCs that (i) have average total consolidated assets over $250 billion or (ii) have average total nonbank assets of $75 billion or more, and (iii) are not LISCC firms. Return to text

 3. Pub. L. No. 111-203, 124 Stat. 1376 (2010); 12 CFR part 252, subpart E. Return to text

 4. In addition to an annual supervisory stress test conducted by the Federal Reserve, each participating institution is required to conduct annual company-run stress tests under the same supervisory scenarios and conduct a mid-cycle stress test under company-developed scenarios. Return to text

 5. Certain newly formed U.S. IHCs are not yet subject to Dodd-Frank Act supervisory stress testing, but are required under the capital plan rule to submit a capital plan to the Federal Reserve that will be subject to a confidential review process. These firms are Barclays US LLC; BNP Paribas USA, Inc.; Credit Suisse Holdings (USA) LLC; Deutsche Bank USA Corp; RBC USA Holdco Corporation; and UBS Americas Holdings LLC. This set of firms will be subject to Dodd-Frank stress testing beginning January 1, 2018. Deutsche Bank Trust Corporation is a subsidiary of a newly formed U.S. IHC that has participated in DFAST and CCAR in previous years and is subject to the supervisory stress test. See 12 CFR 225.8(c)(2); 12 CFR 252.153(e)(l)(ii)(c). Currently, no nonbank financial companies supervised by the Board are subject to the capital planning or stress test requirements. Return to text

 6. Large and noncomplex firms are BHCs or U.S. IHCs that (i) have average total consolidated assets between $50 billion and $250 billion, (ii) have average total nonbank assets of less than $75 billion, and (iii) are not U.S. global systemically important banks. Return to text