Board of Governors of the Federal Reserve System

Preface

The Federal Reserve promotes a safe, sound, and efficient 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 assesses whether BHCs with $100 billion or more in total consolidated assets and U.S. IHCs (together, firms) 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.² 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 heightened expectations for BHCs and U.S. IHCs supervised by the Large Institution Supervision Coordinating Committee (LISCC firms) and "large and complex firms."³

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 firms' 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 rules⁴ serves to inform the Federal Reserve, firms, and the general public of how institutions' capital ratios might change under a hypothetical set of stressful economic conditions developed by the Federal Reserve. 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 with $100 billion or more in total consolidated assets and U.S. IHCs are currently subject to Dodd-Frank supervisory stress testing.⁵
• The Comprehensive Capital Analysis and Review (CCAR) consists of a quantitative assessment for all firms, and a qualitative assessment for firms 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, even after making all planned capital distributions. 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 practices. 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. Enacted on May 24, 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) raised the asset thresholds for application of section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Board will not disclose the current supervisory stress test results for BHCs with greater than or equal to $50 billion but less than $100 billion in total consolidated assets. This document reflects those changes. Return to text

 3. Large and complex firms are BHCs or U.S. IHCs that (1) have average total consolidated assets over $250 billion or (2) have average total nonbank assets of $75 billion or more, and (3) are not LISCC firms. Return to text

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

 5. Currently, no nonbank financial companies supervised by the Board are subject to the capital planning or stress test requirements. Return to text