CCAR: A mixed story of surprises and more work to do

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

Key Facts:

  • 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.

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2018 Dodd-Frank Act Stress Test (DFAST): Our take

The Federal Reserve (“Fed”) released the results of its Dodd-Frank Act Stress Tests (DFAST) that measure the potential impact of adverse or severely adverse economic conditions on the performance and condition of the 35 Bank Holding Companies (BHCs) and Intermediate Holding Companies (IHCs)1 subject to the rule.  These results will be followed on June 28, 2018 by the Fed’s conclusions regarding the adequacy of bank capital plans as evaluated through the Comprehensive Capital Analysis and Review (CCAR).

Key takeaways for the severely adverse scenario results include:

  • All firms exceeded minimum required capital under stress for the fourth year in a row.
  • This year’s test had a higher stress impact than previous years resulting in lower post-stress minimum capital levels, reversing an improving trend. The increase in stress was evidenced by:
    • Higher loss rates on loans (6.4% vs 5.8%)
    • Higher global market shock (GMS) losses (up 22%)2
    • Lower offsetting tax benefits in loss and recovery periods from the new tax law (32 basis points (bp) on risk-weighted assets (RWA) on average)
    • Declines in other comprehensive income (OCI) (30bp on RWA in aggregate)
  • These more stressful results were somewhat offset by lower growth in risk-weighted assets and higher pre-provision net revenue.
  • Impact from changes in law. In response to provisions in the recently passed regulatory relief legislation (S.2155, Economic Growth, Regulatory Reform, and Consumer Protection Act (“EGRRCPA”)), the Fed excluded the three firms below the $100 billion asset threshold3, and announced they would also exclude those firms from the CCAR results.
  • The supplementary leverage ratio was more constraining than last year. For most firms, post-stress supplemental leverage ratios were closer to minimum levels than last year and all firms exceeded the minimum ratio of 3.0 percent.

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FRB, FDIC provide resolution plan feedback to 19 FBOs, tailor supervisory expectations

On August 8, 2017, the Federal Reserve Board (FRB) and Federal Deposit Insurance Corporation (FDIC) (collectively, the agencies) extended, from December 31, 2017 to December 31, 2018, the resolution plan deadline for 21 firms, including 19 foreign banking organizations (FBOs).

On January 29, 2018, the agencies issued firm-specific feedback to these 19 FBOs based on their last resolution plans filed in 2015.1 Although the feedback letters do not identify any deficiencies or shortcomings with respect to the 2015 plans,2 they outline key supervisory expectations that must be met as the FBOs prepare to file their next plans.

FBOs with US IHCs

Eight of the 19 FBOs were required to establish US intermediate holding companies (IHCs) as of July 1, 2016.3 Accordingly, these FBOs are required to describe any changes they have made to their resolution plan resulting from the implementation of the IHC requirement.

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FRB applies global market shock to IHCs

Nearly one year after the Federal Reserve Board (FRB) subjected certain intermediate holding companies (IHCs) to the CFO attestation requirement for the FR Y-14A/Q/M regulatory reports, it further amended the reports by, among other things, modifying the scope of the global market shock (GMS) component of the Dodd-Frank Act stress tests (DFAST) to include certain IHCs.

GMS applicability

Specifically, the FRB amended the application of the GMS to include any firm that (1) has aggregate trading assets and liabilities of $50 billion or more, or aggregate trading assets and liabilities equal to 10 percent or more of total consolidated assets, and (2) is not a “large and noncomplex firm” under its capital plan rule.1 As a result of this change, the FRB expects that six IHCs will become subject to the GMS, and the six US bank holding companies that meet the current materiality threshold will remain subject to the requirement.

Although the FRB finalized the amendment to the GMS threshold as proposed, it decided to delay the application of the GMS to firms that will become newly subject to it (i.e., the six IHCs) until the 2019 Comprehensive Capital Analysis and Review (CCAR) and DFAST exercises (rather than the 2018 exercises, as originally proposed).  The FRB explains that it “recognizes the challenges associated with building the systems necessary to report the data in the trading schedule.”2

However, the FRB emphasized that the “materiality of trading exposures and counterparty positions to US IHCs may warrant applying an additional component to firms that meet such criteria.”  Accordingly, it noted that it may apply such components or scenarios under the 2018 DFAST exercise.

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A new ratings framework aligned to regulatory reform priorities

On August 3, 2017, the Federal Reserve Board (Fed) released a notice of proposed rulemaking that would establish a new rating system for large financial institutions (LFIs). Specifically, the new rating system would apply to bank holding companies (BHCs) and non-insurance, non-commercial savings and loan holding companies (SLHCs) with more than $50 billion in total assets, as well as intermediate holding companies (IHCs) of foreign banking organizations.

The proposal includes a new rating scale under which component ratings would be assigned for:

  1. Capital planning and positions,
  2. Liquidity risk management and positions, and
  3. Governance and controls.

In essence, the Fed is revamping its rating system for LFIs to catch up with the Fed’s post-crisis heightened supervisory expectations and approach to LFI supervision.  The Fed proposes to assign initial ratings under the new rating system during 2018.

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Modernizing risk & compliance and Regulation YY implementation

In our previous blogs on foreign banking organizations (FBOs), we highlighted our thoughts on some of the next set of challenges for large FBOs following the July 1, 2016 compliance deadline to establish Intermediate Holding Companies (IHCs). We recognize the long road to operationalizing run-the-bank (RtB) processes has just begun and the true “use” tests of the IHCs and their combined US Operations will be unfolding for some time. FBOs have experienced a significant period of change for more than three years, and the baton has now been passed from large change programs to implementation programs. The focus has shifted to embedding the IHC/Regulation YY requirements into businesses to execute, control functions (i.e., second line functions) to monitor and test, and internal audit to validate.

It is critical that FBOs operationalize and then sustain their RtB processes, and reinforce and/or enhance the Three Lines of Defense (3 LoD) governance models currently in place. The ability of these functions working end-to-end and across siloes to do their jobs will be a critical point for enabling risk identification, monitoring and mitigation, ensuring a robust risk and compliance culture, and providing a US-centric view of the FBO’s operations and risk profile. The regulatory spotlight, especially over the course of the next year, will be on risk, compliance and internal audit, and the effectiveness of these second and third lines of defense to identify whether the processes are working.

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FRB finalizes regulatory reporting requirements for IHCs, clarifies that IHC subsidiaries of LISCC FBOs are not yet subject to CFO attestation requirement

Posted by Craig Brown, Deloitte Advisory managing director, Deloitte & Touche LLP, on June 2, 2016

As large foreign banking organizations (FBOs) prepare for the July 1, 2016 compliance date to establish their intermediate holding companies (IHCs) under Regulation YY, regulatory reporting has become a key area of focus.  Regulators have increased their expectations with respect to governance, controls, data, and ownership over reporting, especially in connection with the FR Y-14 reports related to capital assessments and stress testing.  Although many IHCs will be subject to certain of the Federal Reserve Board’s (FRB) regulatory reports for the first time, these firms should be prepared to meet regulators’ heightened expectations across their US operations.

On May 31, 2016, the FRB finalized the initial application of several regulatory reports to IHCs—including the FR Y-14 series, the FR Y-9C (Consolidated Financial Statements for Holding Companies), and the FR Y-15 (Banking Organization Systemic Risk Report)—beginning with the reporting period ending on September 30, 2016.  In addition, IHCs must comply with the information collections associated with applicable regulatory capital rules beginning on the July 1, 2016 IHC compliance date.

Although the FRB adopted the regulatory reporting framework for IHCs largely as proposed in February 2016, there are certain key changes and clarifications that IHCs should understand now.

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