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. "Large and noncomplex firms" with total consolidated assets of $100 billion or more are required to submit capital plans and demonstrate an ability to meet their minimum capital requirements under stress as part of CCAR's quantitative assessment but are not subject to CCAR's qualitative assessment of their capital planning practices.6 BHCs that are LISCC or large and complex firms7 are subject to both the qualitative and quantitative assessment processes of CCAR, and their capital plans can be objected to on either quantitative or qualitative grounds.8
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;
- 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 2018, 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 2017.1 This ratio has more than doubled from 5.2 percent in the first quarter of 2009 to 12.3 percent in the fourth quarter of 2017. That gain reflects a total increase of about $800 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 2017.
Figure A. Aggregate common equity capital ratio of CCAR 2018 firms
Source: FR Y-9C.
Common equity capital is expected to continue to increase, as 24 of the 35 firms participating in CCAR 2018 have estimated that their common equity will increase between the third quarter of 2018 and the second quarter of 2019, based on their planned capital actions and net income projections under their BHC baseline scenario.
These 35 firms hold about 80 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 35 firms participating in CCAR 2018 reported data for all periods since 2009. Return to text
2. 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 to define U.S. financial 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 2018 would decline in the severely adverse scenario from 12.3 percent in the fourth quarter of 2017 (the starting point for the exercise) to 6.3 percent at its minimum point over the nine-quarter planning horizon. This post-stress common equity tier 1 ratio is 1.1 percentage points higher than the firms' 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 firms that participated in CCAR 2018.)
Qualitative Assessment
On balance, most of the 18 firms participating in the CCAR 2018 qualitative assessment have continued to strengthen their capital planning practices since last year, with a majority of those firms being close to meeting or meeting supervisory expectations for capital planning practices. However, certain firms have areas of weakness that fall short of meeting supervisory expectations for capital planning, particularly in the area of internal controls. Specific weaknesses include data and IT infrastructure, internal audit, and model risk management that support the capital planning processes. For further information, see the Qualitative Assessment Framework, Process, and Summary of Results section.
Capital Plan Decisions
No firms were objected to on quantitative grounds in CCAR 2018. The Board of Governors objected to the capital plan of DB USA Corporation on qualitative grounds based on material weaknesses in capital planning. The Board of Governors issued a conditional non-objection to the capital plan of State Street Corporation on quantitative grounds and has required the firm to improve the management and analysis of its counterparty exposures under stress. In addition, the Board of Governors issued conditional non-objections to the capital plans of The Goldman Sachs Group, Inc. (Goldman Sachs) and Morgan Stanley based on quantitative grounds. Each firm has agreed to limit their capital distributions to the levels they paid in recent years. 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, 2018:Q1 to 2020:Q1: 35 participating firms
Percent
| Regulatory ratio | Actual 2017:Q4 |
Projected minimum stressed ratios | |
|---|---|---|---|
| Original planned capital actions | Adjusted planned capital actions | ||
| Common equity tier 1 capital ratio | 12.3 | 6.2 | 6.3 |
| Tier 1 capital ratio | 13.9 | 7.9 | 8.0 |
| Total capital ratio | 16.3 | 10.4 | 10.5 |
| Tier 1 leverage ratio | 8.8 | 5.0 | 5.0 |
| Supplementary leverage ratio | n/a | 3.8 | 3.8 |
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 2018 by the firms in their annual capital plans and the minimum ratios incorporating any adjustments to capital distributions made by a firm after reviewing the Federal Reserve's stress test. The minimum capital ratios are for the period 2018:Q1 to 2020: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, 2018:Q1 to 2020:Q1: 35 participating firms
Percent
| Regulatory ratio | Actual 2017:Q4 |
Projected minimum stressed ratios | |
|---|---|---|---|
| Original planned capital actions | Adjusted planned capital actions | ||
| Common equity tier 1 capital ratio | 12.3 | 8.9 | 9.0 |
| Tier 1 capital ratio | 13.9 | 10.5 | 10.6 |
| Total capital ratio | 16.3 | 12.7 | 12.8 |
| Tier 1 leverage ratio | 8.8 | 6.6 | 6.6 |
| Supplementary leverage ratio | n/a | 5.2 | 5.2 |
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 2018 by the firms in their annual capital plans and the minimum ratios incorporating any adjustments to capital distributions made by a firm after reviewing the Federal Reserve's stress test. The minimum capital ratios are for the period 2018:Q1 to 2020: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 2018
| Non-objection to capital plan | Conditional non-objection to capital plan | Objection to capital plan |
|---|---|---|
| Ally Financial Inc. | The Goldman Sachs Group, Inc. | DB USA Corporation |
| American Express Company | Morgan Stanley | |
| Bank of America Corporation | State Street Corporation | |
| BB&T Corporation | ||
| BBVA Compass Bancshares, Inc. | ||
| BMO Financial Corp. | ||
| Barclays US LLC | ||
| BNP Paribas USA, Inc. | ||
| The Bank of New York Mellon Corporation | ||
| Capital One Financial Corporation | ||
| Citigroup Inc. | ||
| Citizens Financial Group, Inc. | ||
| Credit Suisse Holdings (USA) | ||
| Discover Financial Services | ||
| Fifth Third Bancorp | ||
| HSBC North America Holdings Inc. | ||
| Huntington Bancshares Incorporated | ||
| JPMorgan Chase & Co. | ||
| Keycorp | ||
| M&T Bank Corporation | ||
| MUFG Americas Holdings Corporation | ||
| Northern Trust Corporation | ||
| The PNC Financial Services Group, Inc. | ||
| Regions Financial Corporation | ||
| RBC USA Holdco Corporation | ||
| Santander Holdings USA, Inc. | ||
| SunTrust Banks, Inc. | ||
| TD Group U.S. Holdings LLC | ||
| UBS Americas Holding LLC | ||
| US Bancorp | ||
| Wells Fargo & Company |
References
6. Large and noncomplex firms are BHCs or U.S. IHCs that (1) have average total consolidated assets of $50 billion or more, but less than $250 billion, (2) have average total nonbank assets of less than $75 billion, and (3) are not U.S. global systemically important banks. The 17 large and noncomplex firms subject to the quantitative assessment in CCAR 2018 are: Ally Financial Inc.; American Express Company; BB&T Corporation; BBVA Compass Bancshares, Inc.; BMO Financial Corp.; BNP Paribas USA, Inc.; Citizens Financial Group, Inc.; 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.; and SunTrust Banks, Inc. Return to text
7. The 18 LISCC and large and complex firms subject to the quantitative and qualitative assessment in CCAR 2018 are: Bank of America Corporation; The Bank of New York Mellon Corporation; Barclays US LLC; Capital One Financial Corporation; Citigroup Inc.; Credit Suisse Holdings (USA), Inc.; DB USA Corporation; The Goldman Sachs Group, Inc.; HSBC North America Holdings Inc.; JPMorgan Chase & Co.; Morgan Stanley; The PNC Financial Services Group, Inc.; RBC USA Holdco Corporation; State Street Corporation; TD Group US Holdings LLC; UBS Americas Holding LLC; U.S. Bancorp; and Wells Fargo & Company. Return to text
8. As part of the notice of proposed rulemaking introducing the stress capital buffer, the Board proposed a number of changes to the capital plan rule, including the elimination of the quantitative objection. The Board also asked a number of questions, including whether the Board should consider removing or adjusting the provisions that allow the Board to object to a large and complex or LISCC firm's capital plan on the basis of qualitative deficiencies in the firm's capital planning process. The Board will consider all comments on the proposal. 83 FR 18171 (April 25, 2018). Return to text