Federal Reserve Board releases supervisory scenarios and instructions for 2014 capital planning and stress testing

by Sabrina I. Pacifici on November 1, 2013

“The Federal Reserve Board on Friday issued the supervisory scenarios that will be used in the 2014 capital planning and stress testing program, as well as instructions to firms with timelines for submissions.  The program includes the Comprehensive Capital Analysis and Review (CCAR) of 30 bank holding companies with $50 billion or more of total consolidated assets.  The aim of the annual reviews is to ensure that large financial institutions have robust, forward-looking capital planning processes that account for their unique risks, and to help ensure that they have sufficient capital to continue operations throughout times of economic and financial stress.  Capital is important to banking organizations, the financial system, and the economy broadly because it acts as a cushion to absorb losses and helps to ensure that losses are borne by shareholders, not taxpayers…Financial institutions submitting capital plans will be evaluated to ensure they have sufficient capital to continue to lend to households and businesses even under stressful conditions.  In addition, they must incorporate the transition requirements from the recently finalized Basel III capital standards into their stress tests and capital plans. CCAR includes an evaluation of institutions’ plans to make capital distributions, such as dividend payments or stock repurchases.  The Federal Reserve will approve capital distributions only for institutions whose capital plans it approves and who demonstrate sufficient financial strength even after making the planned capital distributions to continue operating as financial intermediaries under stressful economic and financial conditions. Eighteen bank holding companies will be participating in the CCAR for the fourth consecutive year in 2014.  An additional 12 financial institutions will be participating in CCAR for the first time during this stress testing cycle.  The capital planning and stress testing program led by the Federal Reserve since the financial crisis has contributed to a significant increase in capital at the largest banking organizations in the United States.  The 18 bank holding companies have increased their aggregate tier 1 common capital to $836 billion in the second quarter of 2013, the period of most recent data, from $392 billion in the first quarter of 2009.  The tier 1 common ratio for these firms, which compares high-quality capital to risk-weighted assets, has more than doubled to a weighted average of 11.1 percent from 5.3 percent.”

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