Think of it as the Federal Reserve’s report card for big banks. On Wednesday it released its assessment of the capital plans submitted by 33 bank holding companies.
The Comprehensive Capital Analysis and Review annually assesses whether BHCs with $50 billion or more in total consolidated assets have effective capital planning processes and sufficient capital to absorb losses during stressful conditions, while meeting obligations to creditors and counterparties and continuing to serve as credit intermediaries.
Thirty of the plans passed muster with no objections. The Federal Reserve is, however, requiring Morgan Stanley to submit a new capital plan by the end of the fourth quarter of 2016 to address identified weaknesses in its capital planning processes.
The plans submitted by Deutsche Bank and Santander both faced objections based on qualitative concerns. If the Federal Reserve objects to a capital plan, a firm may not make any capital distributions unless it is expressly authorized.
CCAR, in its sixth year, evaluates the capital planning processes and capital adequacy of the largest U.S.-based bank holding companies, including the firms' planned capital actions such as dividend payments and share buybacks and issuances. “Strong capital levels act as a cushion to absorb losses and help ensure that banking organizations have the ability to lend to households and businesses even in times of stress,” the Fed says.
When considering a firm's capital plan, the Federal Reserve considers both quantitative and qualitative factors. Quantitative factors include a firm's projected capital ratios under a hypothetical scenario of severe economic and financial market stress. Qualitative factors include the strength of the firm's capital planning process, which incorporate the risk management, internal controls, and governance practices that support the process.
The Federal Reserve did not object to the capital plans of Ally Financial; American Express; BancWest; Bank of America; The Bank of New York Mellon; BB&T; BBVA Compass Bancshares.; BMO Financial; Capital One Financial; Citigroup; Citizens Financial Group; Comerica; Discover Financial Services; Fifth Third Bancorp; Goldman Sachs Group; HSBC North America Holdings; Huntington Bancshares; JP Morgan Chase; Keycorp; M&T Bank; MUFG Americas Holdings; Northern Trust; The PNC Financial Services Group; Regions Financial Corporation; State Street Corporation; SunTrust Banks; TD Group US Holdings; U.S. Bancorp; Wells Fargo; and Zions Bancorporation.
While the Fed’s Board of Governors did not object to Morgan Stanley’s capital plan, “it exhibited material weaknesses in its capital planning process” that “warrant further near-term attention, but do not undermine the quantitative results of the stress tests for the firm.” Issues included: shortcomings in the firm’s scenario design practices, which do not adequately reflect risks and vulnerabilities specific to the firm; weaknesses in some aspects of the firm’s modeling practices; and weaknesses in governance and controls around both scenario design and modeling practices.
Morgan Stanley was directed to address these weaknesses and resubmit its capital plan by December 29, 2016 to avoid a formal objection and a prohibition on capital distributions.
Deutsche Bank and Santander had their plans rejected “because of broad and substantial weaknesses across their capital planning processes, and insufficient progress these firms have made toward correcting those weaknesses and meeting supervisory expectations.” They may resubmit their capital plans “following substantial progress in the remediation of the issues that led to the objections.”
The Board objected to the CCAR 2016 capital plan of Deutsche Bank Trust Corporation on qualitative grounds. Although there were “improvements in certain aspects of capital planning,” it continues to have “material, unresolved supervisory issues that critically undermine its capital planning process.” In particular, the Fed identified deficiencies in risk management and control infrastructures, including risk measurement processes, stress testing processes, and data infrastructure.
Although Santander has made “progress in improving certain approaches to loss and revenue projection, the firm continues to have material unresolved supervisory issues that critically undermine its capital planning process.”
“The assumptions and analysis underlying the capital plan, and the capital adequacy process, are not reasonable or appropriate” the Fed warned, citing “ongoing deficiencies in the risk management framework, including important features of the risk measurement and monitoring function; stress testing processes; and internal controls, governance, and oversight functions.
U.S. firms have substantially increased their capital since the first round of stress tests led by the Federal Reserve in 2009. The common equity capital ratio —which compares high-quality capital to risk-weighted assets—of the 33 bank holding companies in the 2016 CCAR has more than doubled from 5.5 percent in the first quarter of 2009 to 12.2 percent in the first quarter of 2016. This reflects an increase of more than $700 billion in common equity capital to a total of $1.2 trillion during the same period.