Process and Requirements after CCAR 2019
Execution of Capital Plan and Consequences of a Federal Reserve Objection to a Plan
The Federal Reserve evaluates planned capital actions for the full nine-quarter planning horizon to better understand each firm's capital management strategy and to assess post-stress capital levels over the full planning horizon.19 While the nine-quarter planning horizon reflected in the 2019 capital plans extends to the beginning of 2021, the Federal Reserve's decision to object or not object to firms' planned capital actions is carried out annually and applies only to the four quarters following the disclosure of results. Therefore, the Federal Reserve's decisions with regard to planned capital distributions in CCAR 2019 will apply from the beginning of the third quarter of 2019 through the end of the second quarter of 2020.
When the Federal Reserve objects to a firm's capital plan, the firm may not make any capital distribution unless expressly permitted by the Federal Reserve.20 For those firms that did not receive an objection to their capital plans, the capital plan rule provides that a firm generally must request prior approval of a capital distribution if the dollar amount of the capital distribution will exceed the amount described in their capital plan (gross distribution limit).21
In addition, a firm generally must request the Board's non-objection for capital distributions included in the firm's capital plan if the firm has issued less capital of a given class of regulatory capital instrument (net of distributions) than the firm had included in its capital plan, measured cumulatively, beginning with the third quarter of the planning horizon (the third quarter of 2019).22 For example, a firm that planned to issue common stock in the fourth quarter of 2019, but issued less stock than included in its capital plan, would be prohibited from making planned common dividends, share repurchases, or both in that quarter and subsequent quarters unless and until it offsets the excess net distributions. A firm's consistent failure to issue the regulatory capital included in its plan may be indicative of shortcomings in the firm's capital planning process and may negatively influence the Federal Reserve's assessment of the firm's capital plans in future years.
Potential Additional Supervisory Actions
In the event the Federal Reserve observes deficiencies in firms' capital planning practices through CCAR's qualitative assessment that call into question their ability to determine their capital needs under normal or stressed financial conditions, those firms may also be subject to a deficient capital planning and positions rating and an enforcement action. In addition, consistent with the capital plan rule, if the Federal Reserve determines that a firm has unsafe or unsound capital planning practices or the financial condition of the firm is unsafe or unsound, the Federal Reserve may issue a public capital directive, such as a directive to reduce capital distributions, or take other supervisory or public enforcement actions, including actions to address such unsafe and unsound practices or other conditions or violations of law.
Resubmissions
If a firm's capital plan was objected to, it may resubmit its plan in advance of the next CCAR exercise, but it is not required to do so.23 The Federal Reserve can require a firm to resubmit its capital plan following CCAR for a number of reasons, including if there has been or will likely be a material change in the firm's risk profile, financial condition, or corporate structure; the firm's stress scenarios are no longer appropriate for the firm's business models or portfolios; or changes in the macroeconomic outlook that could materially affect the firm's risk profile and financial condition require the use of updated scenarios.24 As detailed in the capital plan rule, a firm must update and resubmit its capital plan if it determines there has been or will be a material change in the firm's risk profile (including a material change in its business strategy or any material risk exposures), financial condition, or corporate structure since the firm adopted the capital plan.25
References
19. See Board of Governors, Comprehensive Capital Analysis and Review 2019 Summary Instructions, https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20190306b2.pdf. Return to text
20. See 12 CFR 225.8(f)(2)(iv). Return to text
21. A firm is not required to provide prior notice and seek approval for distributions involving issuances of instruments that would qualify for inclusion in the numerator of regulatory capital ratios that were not included in the firm's capital plan. See 12 CFR 225.8(g)(1). Return to text
22. The classes of regulatory capital instruments are common equity tier 1, additional tier 1, and tier 2 capital instruments, as defined in 12 CFR 217.2. Firms are not required to provide prior notice and seek approval for distributions included in their capital plans that are scheduled payments on additional tier 1 or tier 2 capital. In addition, firms are not required to provide prior notice and seek approval where the shortfall in capital issuance (net of distributions) is due to employee-directed capital issuances related to an employee stock ownership plan, a planned merger or acquisition that is no longer expected to be consummated or for which the consideration paid was lower than the projected price in the capital plan, or if aggregate excess net distributions are less than 0.25 percent of the firm's tier 1 capital. See 12 CFR 225.8(g)(3)(iii). Return to text
23. See 12 CFR 225.8(e)(4)(ii). Return to text
24. See 12 CFR 225.8(e)(4)(i)(B). Return to text
25. See 12 CFR 225.8(e)(4)(i)(A). Return to text