Board of Governors of the Federal Reserve System

Quantitative Assessment Framework and Summary of Results

Assessment Framework

In the quantitative assessment, the Federal Reserve evaluated each firm's ability to maintain post-stress capital ratios above the applicable minimum regulatory capital ratios in effect during each quarter of the planning horizon under both expected and stressful conditions, after taking the capital actions described in the BHC baseline scenario of its capital plan. The CCAR quantitative assessment is based both on: (a) the results of the firm's internal stress tests and (b) post-stress capital ratios estimated by the Federal Reserve under the supervisory scenarios (CCAR supervisory post-stress capital analysis). The Federal Reserve may object to the capital plan of any firm that has not demonstrated an ability to maintain capital above each minimum regulatory capital ratio throughout the planning horizon in the post-stress capital analysis.

The CCAR supervisory post-stress capital analysis is based on estimates of net income, total assets, and risk-weighted assets from the Federal Reserve's supervisory stress test conducted under the Dodd-Frank Act.¹⁵ (For a comparison of the Dodd-Frank Act stress tests and CCAR, see box 2.) As described in the overview of the methodology of the Dodd-Frank Act supervisory stress tests published on June 21, 2018, for these projections, the Federal Reserve uses data provided by all firms in the CCAR quantitative assessment and a set of models developed or selected by the Federal Reserve.¹⁶

The supervisory projections are conducted under three hypothetical macroeconomic and financial market scenarios developed by the Federal Reserve: the baseline, adverse, and severely adverse supervisory stress scenarios. While the same supervisory scenarios applied to all firms, a subset of firms was also subject to additional components in the severely adverse and adverse scenarios: the global market shock, counterparty default scenario, and supervisory market risk components.¹⁷ Firms were required to conduct stress tests using the same supervisory scenarios, at least one stress scenario developed by the firm (the BHC stress scenario), and a baseline scenario developed by the firm (BHC baseline scenario).¹⁸

As noted, the Federal Reserve incorporates a firm's planned capital actions under its baseline scenario, including any capital actions associated with business plan changes, in projecting the firm's post-stress capital ratios. Thus, the firms are assumed to maintain the level of dividends, share repurchases, and other capital distributions they in fact plan to execute over the planning horizon despite the hypothetically severe deterioration in the economic and financial environment. In an actual downturn, firms may reduce capital distributions under stressful conditions.

The Federal Reserve provides each firm with a one-time opportunity to adjust its planned capital distributions after it receives the Federal Reserve's preliminary estimates of the firm's post-stress capital ratios. For this adjustment, the Federal Reserve considered reductions in capital distributions, including decreasing planned common stock dividends and/or reducing planned repurchases or redemptions of other regulatory capital instruments, relative to those initially submitted by a firm in its April 2018 capital plan. The Federal Reserve also considered increases in firms' planned issuances of common stock in the third quarter of the planning horizon in instances where a firm has reduced its planned capital distributions to zero in the second through ninth quarters of the planning horizon. These adjusted capital actions, where applicable, were then incorporated into the Federal Reserve's projections to calculate adjusted post-stress capital levels and ratios. The Federal Reserve discloses post-stress results with a firm's original capital actions and any adjusted capital actions.

Summary of Quantitative Results

The Board of Governors did not object to any firm's capital plan on quantitative grounds.

The Board of Governors issued conditional non-objections to the capital plans of Goldman Sachs, Morgan Stanley, and State Street Corporation.

Results of Quantitative Assessment

Tables 4 and 5 contain minimum post-stress common equity tier 1 ratios for each of the firms under the supervisory severely adverse and adverse scenarios. The middle column of the table incorporates the original planned capital distributions submitted by the firms in April 2018. The ratios reported in the right-hand column incorporate any adjusted capital distributions submitted by a firm after receiving the Federal Reserve's preliminary CCAR post-stress capital analysis.

Tables 6.A and 6.B report minimum capital ratios under the supervisory severely adverse scenario based on both the original and adjusted planned capital actions, where applicable. The ratios based on adjusted capital actions are only reported for those firms that submitted adjusted capital actions. The results in table 6.A are for firms subject to the advanced approaches, and the results in 6.B are for firms that are not subject to the advanced approaches.

In the supervisory severely adverse scenario, American Express Company, JPMorgan Chase & Co., KeyCorp, and M&T Bank Corporation were projected to have at least one minimum post-stress capital ratio lower than the minimum required regulatory capital ratios based on their original planned capital actions. However, they were able to maintain their post-stress regulatory capital ratios above minimum requirements in the severely adverse scenario after submitting adjusted capital actions. There is no restriction imposed by the Board if a firm adjusts its capital plan.

The Board of Governors issued a conditional non-objection to the capital plans of Goldman Sachs, Morgan Stanley, and State Street Corporation. In the supervisory severely adverse scenario, each firm is projected to have at least one minimum post-stress capital ratio lower than the minimum required regulatory capital ratios. The post-stress capital ratios of these firms were affected by, among other factors, the enactment of the Tax Cuts and Jobs Act (TCJA) on their starting and projected capital positions under stress.

In assessing the capital plans submitted by these firms, the Board took into account a number of factors, including the one-time negative impact that resulted from the TCJA and not as a result of the stress test, the relative timing of the tax law changes, and the longer-term positive effect of the TCJA. Specifically, the TCJA resulted in one-time downward adjustments in the capital ratios of these firms, which do not reflect the firms' performances under stress. Additionally, the enactment of TCJA in late December introduced uncertainties that affected the capital ratios of the firms under CCAR. The TCJA is also expected to have a positive effect on firms' capital positions over time as the lower corporate tax rate boosts firms' earnings after taxes. The Federal Reserve expects each of these firms to strengthen its capital position in the near term.

Goldman Sachs

The Board of Governors did not object to Goldman Sachs' capital plan. The firm fell below the minimum required tier 1 leverage and supplementary leverage ratios on a post-stress basis. Goldman Sachs has agreed to limit the amount of its planned capital distributions to no more than a benchmark based on prior actual capital distributions. The benchmark is set at the greater of the actual distributions the firm made over the previous four calendar quarters and the annualized average of actual distributions over the previous eight calendar quarters.

Morgan Stanley

The Board of Governors did not object to Morgan Stanley's capital plan. The firm fell below the minimum required tier 1 leverage and supplementary leverage ratios on a post-stress basis. Morgan Stanley has agreed to limit the amount of its planned capital distributions to no more than a benchmark based on prior actual capital distributions. The benchmark is set at the greater of the actual distributions the firm made over the previous four calendar quarters and the annualized average of actual distributions over the previous eight calendar quarters.

State Street

The Board of Governors did not object to State Street Corporation's capital plan. However, State Street Corporation fell below the minimum required common equity tier 1 and tier 1 leverage ratios on a on a post-stress basis. The Board has required the firm to improve the management and analysis of its counterparty exposures under stress.

Under the Board's capital plan rule, firms may re-submit their capital plans before the next stress test cycle and request additional distributions.

Tables 7.A and 7.B report minimum capital ratios in the supervisory adverse scenario based on both the original and adjusted planned capital actions, where applicable. The minimum capital ratios were generally higher in the supervisory adverse scenario than in the supervisory severely adverse scenario.

Table 4. Projected minimum common equity tier 1 ratio in the severely adverse scenario, 2018:Q1 to 2020:Q1

Table 5. Projected minimum common equity tier 1 ratio in the adverse scenario, 2018:Q1 to 2020:Q1

Table 6.A. Projected minimum regulatory capital ratios in the severely adverse scenario, 2018:Q1 to 2020:Q1: Advanced approaches firms

Required minimum capital ratios in CCAR 2018 for advanced approaches firms (percent)

Table 6.B. Projected minimum regulatory capital ratios in the severely adverse scenario, 2018:Q1to 2020:Q1: Non-advanced approaches firms

Required minimum capital ratios in CCAR 2018 for other firms (percent)

Table 7.A. Projected minimum regulatory capital ratios in the adverse scenario, 2018:Q1 to 2020:Q1: Advanced approaches firms

Required minimum capital ratios in CCAR 2018 for advanced approaches firms (percent)

Table 7.B. Projected minimum regulatory capital ratios in the adverse scenario, 2018:Q1to 2020:Q1: Non-advanced approaches firms

Required minimum capital ratios in CCAR 2018 for other firms (percent)

References

 15. For more on the methodology of the Federal Reserve's supervisory stress test, see Board of Governors of the Federal Reserve System, Dodd-Frank Act Stress Test 2018: Supervisory Stress Test Methodology and Results (Washington: Board of Governors, June 2018), www.federalreserve.gov/publications/files/2018-dfast-methodology-results-20180621.pdf. Return to text

 16. For CCAR 2018, in addition to the models developed and data collected by the Federal Reserve, the Federal Reserve used proprietary models and 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 System, Dodd-Frank Act Stress Test 2018: Supervisory Stress Test Methodology and Results (Washington: Board of Governors, June 2018), www.federalreserve.gov/publications/files/2018-dfast-methodology-results-20180621.pdf (see page 63, footnote 40). Return to text

 17. The six firms that were subject to the global market shock are Bank of America Corporation; Citigroup Inc.; The Goldman Sachs Group, Inc.; JPMorgan Chase & Co.; Morgan Stanley; and Wells Fargo & Company. See 12 CFR 252.54(b)(2). The eight firms that were subject to the counterparty default component are Bank of America Corporation; The Bank of New York Mellon Corporation; Citigroup Inc.; The Goldman Sachs Group, Inc.; JPMorgan Chase & Co.; Morgan Stanley; State Street Corporation; and Wells Fargo & Company. The six firms that were subject to the supervisory market risk component are: Barclays US LLC; Credit Suisse Holdings (USA), Inc.; DB USA Corporation; HSBC North America Holdings Inc.; RBC USA Holdco Corporation; and UBS Americas Holdings LLC. See 12 CFR 252.54(b)(2); Board of Governors of the Federal Reserve System, 2018 Supervisory Scenarios for Annual Stress Tests Required under the Dodd-Frank Act Stress Testing Rules and the Capital Plan Rule (Washington: Board of Governors, February 2018), www.federalreserve.gov/publications/2018-february-supervisory-scenarios-for-annual-stress-tests.htm. Return to text

 18. The Federal Reserve expects a firm that uses the supervisory baseline scenario as its BHC baseline scenario to explain why the supervisory baseline scenario is an appropriate representation of the most likely outlook for the risk factors salient to the firm. Return to text