CCAR: The journey continues

The Federal Reserve (“Fed”) released the results of its Comprehensive Capital Analysis and Review (CCAR) for 2016 on June 29.  Some key facts:

  • Fed noted objections to two firms out of thirty-three (Deutsche Bank and Santander) and required resubmission for one (Morgan Stanley)
  • All objections and resubmissions were driven by Fed-cited weaknesses around qualitative issues
  • No firm failed to meet post-stress capital minimums, and compared to four the previous year, only one firm (M&T) needed to scale back its capital distribution request to do so, taking a so-called “mulligan”

The prior week’s release of the Dodd-Frank Act Stress Test (DFAST) results provided more detailed information on the Fed’s stress test.  Compared to CCAR, those results exclude buybacks and capital issuances and hold past common dividends constant.

Some key takeaways

  • Systemic and complex firms1 continue to fall short of the Fed’s high expectations. While the Fed noted that all banks are making progress, it singled out systemic and complex firms as needing to make continued progress toward meeting and exceeding expectations in all aspects of capital planning. Some key areas needing improvement include:
    • Risk identification
    • Critical or effective challenge of assumptions and results
    • Strong internal controls
    • Effective internal audit program and coverage
  • Large and noncomplex firms are meeting or close to meeting expectations. With one exception, this group has demonstrated that it is able to remediate past concerns in revenue and loss modeling, consider their material risks, and address key control and governance of the capital planning.
  • Stress impact: A tale of two industries. The Fed’s stress scenario this year resulted in two very different outcomes depending on business focus.  The magnitude of the decline in capital ratios compared to the prior year was more severe for firms with a traditional C&I focus and less stressful for trading-oriented firms.
  • Capital actions matter. The requested capital actions have a significant influence on minimum post-stress ratios for most firms and were generally larger than the prior year. For trading firms that took a mulligan last year, the lower stress impact this year appears to have provided enough capital buffer that they did not need to scale back.
  • Tier 1 leverage and Tier 1 capital most constraining ratios. While all firms exceeded the minimum requirements under stress, the leverage and Tier 1 ratios had the lowest buffers over minimums of the four regulatory requirements. Thirteen of the firms were most constrained by Tier 1 leverage, followed by twelve hemmed in by Tier 1 capital.  Trading and custody banks in particular were constrained by the leverage requirement. Common equity Tier 1 was most constraining for five firms, three firms found total capital to be a challenge, and one firm was equally constrained by Tier 1 leverage and common equity Tier 1.

Our take

Systemic and complex firms will dominate the Fed’s CCAR supervisory agenda

  • A Pivot to systemic and complex firms: Recent comments by Governor Tarullo that the Fed intends to suspend the qualitative aspects of CCAR for large and noncomplex firms could further intensify the program for systemic and complex firms.  Starting as early as this next CCAR cycle, the Fed will be able to shift expertise and resources to reviews of systemic and complex firms, including new intermediate holding company (IHC) entrants.
  • CCAR around the clock: The Fed has already noted that as part of their “year-round” supervisory program supporting CCAR, they intend to conduct a thorough review of internal audit.  This is just one part of the Fed’s efforts to spread CCAR-related reviews throughout the year and avoid the peak demand of April’s “Normandy invasion”.  Institutions should expect to see more CCAR-related exams happen prior to plan submission in 2017.
  • No guarantees: For the fourth year in a row, at least one firm that received an objection or was required to resubmit had “passed” muster the prior year.  This is a clear demonstration of the Fed’s escalating expectations and desire for steady progress over time.
  • Continued use of conditional approval:  Conditional approval with resubmission continues as a tool to push firms with particular, but not widespread, weaknesses to remediate quickly; Conditional approval and resubmission was given to two of the largest firms for the first time in 2013, none in 2014, and now one in both 2015 and 2016.

 Summary of results

Aggregate results and buffers over minimums

In aggregate, the lowest capital ratios over the nine-quarter forecast (post-stress minimums) were down from starting actual ratios by between 330 and 520 basis points across categories.  However, stress minimums were well above minimum regulatory requirements.

CCAR severly adverse 2016
Source:  Deloitte analysis of Comprehensive Capital Analysis and Review 2016: Assessment and Framework and Results, years 2015 to 2016

The size of buffers over minimum requirements varied widely across banks, as illustrated below, for the common equity Tier 1 capital ratio sorted in descending stress minimum ratio order .  The dark blue portion of the bar indicates the degree of stress impact on the actual starting capital ratio.

stress impact on starting actual capital ratios
Source:  Deloitte analysis of Comprehensive Capital Analysis and Review 2016: Assessment and Framework and Results, 2016

Capital actions matter

The Fed stress tests include the conservative assumption that historical or requested capital distributions under normal conditions will also continue during stress. While DFAST incorporates the assumption that dividends will be maintained at the same rate as in the prior four quarters, CCAR results include firm requests for dividend increases and stock buy backs.  Consequently, stress capital ratios can be lower in the CCAR results due to these potentially higher capital distribution levels.  In aggregate, the effect on common equity Tier 1 was a reduction of the minimum ratio of 1.3 percentage points, compared to 1.0 percentage point the prior year.  The amount of capital action impact varied widely across firms, with most reducing the stress minimum in the 100 – 200 basis point range.  Compared to 2015, most firms appear to have increased their capital ask, and only one firm needed to scale back its request, compared to four the previous year.

Stress impact on capital ratios improves for some

The stress impact on Bank Holding Company (BHC) capital ratios (starting capital ratio compared to minimum post-stress capital ratio) has improved in aggregate this year, reversing a worsening trend.  However, about one-third of the firms, largely more traditional lenders, continued to experience worsening trends.

CCAR stress impact on capital ratios - calculated
Source:  Deloitte analysis of Comprehensive Capital Analysis and Review 2016: Assessment and Framework and Results, years 2014 to 2016

In aggregate, post-stress minimum capital ratios are substantially higher than in prior years and, as noted earlier, amply exceed the minimum required.

CCAR severly adverse ratio - minimum
Source:  Deloitte analysis of Comprehensive Capital Analysis and Review 2016: Assessment and Framework and Results, years 2014 to 2016

Preparing for next year

2017 planning:  With only a year until the next CCAR exercise – as opposed to one year and a quarter last time – there is less time for remediation.  Firms should prepare detailed remediation plans to improve communication with the Fed.  They should also be prepared for exams that touch on the key issues of their past CCAR well before their capital plan submission.

Expect the unexpected yet again:  With less stress on trading banks and more on traditional banks this year, next year the pendulum could swing the other way.  Given the evolving Brexit consequences and greater uncertainty, the Fed may design a scenario that is more targeted at certain new potential vulnerabilities.  As always, having a flexible CCAR program that can respond to a wide range of macro and idiosyncratic scenarios could be key to effectively navigating the next CCAR cycle.

Expect head winds:  While the Fed postponed the introduction of the supplementary leverage ratio (SLR) requirement for this year, it will apply in CCAR 2017.  The SLR applies to systemic and complex firms beginning in the first quarter of 2018, and therefore in the fifth quarter of next year’s CCAR forecast and beyond.  These new requirements will likely pose a new constraint dynamic under stress that of course will be dependent on firm business models as well as the design of the Fed scenario.  Over the longer term, the eight Global Systemically Important Banks (GSIBs) will also potentially contend with the phase in of the GSIB surcharge as part of the post-stress minimum capital requirement.

Data, data, data:  The Fed has been emphasizing the need for improved data quality for the last several years and it has been at the core of some objection decisions.  With the advent of formal CCAR report attestations this coming yearend, and the emphasis on end-to-end controls in the capital planning process, the Fed is likely to test whether attestations are backed by adequate data governance, controls and infrastructure.

Be specific and deliver on time  To address outstanding weaknesses identified by the Fed, many firms will be asked to enhance current processes and develop remediation plans, inclusive of accountable parties, activities, and, milestones to be completed prior to the next CCAR cycle or beyond.  Just like BHCs and IHCs, the Fed does not like surprises, so sticking to deadlines or providing updates on any slippage is important in making sure that firms and regulators are on the same page.  Not delivering key remediation items on time or of adequate quality can drive an objection decision.  Moreover, being clear on items that have longer duration remediation, getting agreement, and defining a delivery date is also important to avoiding objection.

1Systemic and Complex firms in this document refers to (1) those firms subject to the Federal Reserve’s Large Institution Supervision Coordination Committee (LISCC) framework and (2) Large and Complex bank holding companies (BHCs) and intermediate holding companies (IHCs) of foreign banking organizations that have total assets greater than $250 billion or total on-balance sheet foreign exposure of more than $10 billion.  Large and Noncomplex firms are US BHCs and IHCs that are not part of the LISCC framework, have assets of between $50 billion and $250 billion, and total on-balance sheet foreign exposure of less than $10 billion.

Sources of data utilized within this document from the Board of Governors of the Federal Reserve System are listed below.

  1. Comprehensive Capital Analysis and Review 2016: Assessment and Framework and Results, June 2016
  2. Comprehensive Capital Analysis and Review 2015: Assessment and Framework and Results, March 2015
  3. Comprehensive Capital Analysis and Review 2014: Assessment and Framework and Results, March 2014
  4. Comprehensive Capital Analysis and Review 2013: Assessment and Framework and Results, March 2013
  5. Dodd-Frank Act Stress Test 2015: Supervisory Stress Test Methodology and Results, June 2016
  6. Dodd-Frank Act Stress Test 2015: Supervisory Stress Test Methodology and Results, March 2015
  7. Dodd-Frank Act Stress Test 2014: Supervisory Stress Test Methodology and Results, March 2014
  8. Dodd-Frank Act Stress Test 2013: Supervisory Stress Test Methodology and Results, March 2013


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