The Federal Reserve (“Fed”) released the results of its Comprehensive Capital Analysis and Review (CCAR) for 2018 on June 28. The results cover 35 bank holding companies (BHCs) and Intermediate Holding Companies (IHCs1) subject to the capital planning and stress test rule. In addition to the stress test results, the conclusions on the adequacy of the capital planning process for the 18 systemic and complex firms subject to the qualitative portion of the review are also provided.2
- The Fed objected to one firm, Deutsche Bank USA, on qualitative grounds, and granted conditional non- objections for three firms, Goldman Sachs, Morgan Stanley and State Street.
- A record number of firms, six, adjusted their dividend or stock buy-back requests to avoid objection, the so-called mulligan, exceeding the prior record of four firms making adjustments in 2015 (see below).
- Capital planning internal controls in many instances continue to fall below the Federal Reserve’s supervisory expectations.
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. A link to our take on the DFAST results can be found here.
The breadth and depth of the noted deficiencies suggests the Fed will be issuing to firms a number of matters requiring attention and expecting institutions to put together concrete remediation plans.
Summary of CCAR results for severely adverse scenario
Aggregate results and buffers over minimums
In aggregate, stress minimums were well above minimum regulatory requirements as shown below.
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.
Similarly for the 18 firms subject to the supplementary ratio, there were widely disparate amounts of headroom above the ratios, as shown by the blue bars. These stress minimums were lower than for the 2017 results, the green bar, as shown for firms that also participated in last year’s CCAR.
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.
Strong capital requests, the greater severity of the scenario and new tax law effects all served to reverse the leveling or improving trends in post stress minimums, while still remaining well above minimum requirements.
What is in store for CCAR next year?
Transformation of CCAR in 2019
The Federal Reserve proposed significant changes to both the capital rules and the CCAR process in its notice of proposed rulemaking in April of 2018. In essence, the proposal would:
Going forward. Regardless of how the qualitative portion of CCAR may be modified or tailored, examiners will be reviewing the strength of capital planning processes in one forum or another. In fact, the Fed’s new proposed rating system includes an explicit rating covering capital governance and planning processes. They will be evaluating past remediation efforts and issuing new matters requiring attention as new issues are uncovered. The Fed’s list of outstanding shortfalls suggest the need for sustaining momentum in the areas of loss forecasting, data quality, model risk management and internal audit, among others. In addition, firms not subject to the Fed’s CCAR qualitative review are nevertheless undergoing capital planning horizontals as part of their ongoing supervision. Maintaining a focus on remediation will be paramount to enter a more sustainable and cost effective phase of capital planning.
Shift to efficiency, robotics, and operational excellence
As we noted last year, after the intensive build stage for capital planning, institutions are ready to pivot to a more sustainable and efficient program that fits more seamlessly into an institution’s business-as-usual operations. Increasingly, firms are taking a step back to look at what they have built and are rationalizing the number of steps, handoffs, and overall complexity, with an eye toward streamlining and automating where possible. Several firms are taking a disciplined look at business process improvement and experimenting with the use of robotics in ways that can reduce the likelihood of operational error, reduce costs, and produce more reliable results.
Given that capital is one of the Fed’s four fundamental pillars of its supervisory framework, institutions will need to further mature their current approaches. Institutions that transition their efforts from project mode to a business as usual process for risk management, governance and financial monitoring will bring a continued process improvement to their institutions that will help them identify and manage emerging risks and issues.
Sources of data utilized within this document from the Board of Governors of the Federal Reserve System are listed below.
The authors would like to acknowledge the important contributions of Tarpan Gupta, Manager | Deloitte Risk and Financial Advisory, Deloitte & Touche LLP and Connor Georgiopoulos, Consultant | Deloitte Risk and Financial Advisory, Deloitte & Touche LLP in preparing the analysis for this blog.
1Six IHCs were added for this year’s DFAST: Barclays, Credit Suisse, UBS, RBC, Deutsche Bank USA, and BNP Paribas. Both Deutsche Bank USA and BNP Paribas subsumed BHC subsidiaries of their parent organizations that were previous filers, Deutche Bank TC and BancWest, respectively.
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