Capital Plan and CCAR 
Published: Mar-19-12
 
Capital Plans Rule / Comprehensive Capital Analysis and Review (CCAR)

The Federal Reserve recently issued a capital plans final rule requiring U.S. bank holding companies with total assets of $50 billion or more to submit to an annual capital planning review process referred to as the Comprehensive Capital Analysis and Review (CCAR) .  The CCAR capital planning review process includes a supervisory stress test designed to test the adequacy of each firm’s internal analysis of their capital adequacy.  At the same time they issued the final rule, the Federal Reserve also kicked off their 2012 annual CCAR review, issuing detailed instructions to each of the firms that were required to participate.

The Federal Reserve’s objective with the CCAR is to ensure that large, systemically important banking institutions have forward-looking, institution-specific, risk tailored capital planning processes that provide reasonable assurance that they will have sufficient capital to remain going concerns in times of economic and financial distress.  The bank holding companies are expected to have credible two year pro forma plans that illustrate that they will have sufficient capital to operate their banking business as usual, under adverse conditions, while still meeting Basel regulatory capital standards. 

As part of the CCAR process, each year bank holding company boards of directors will be required to review and approve their firm’s capital plans before submission to the Federal Reserve.  The Federal Reserve will in turn evaluate each institution’s capital plan and capital adequacy, their internal capital adequacy assessment processes, and their dividend or stock repurchase plans.  Any dividend increases or other capital distributions will only be approved for companies whose capital plans have been also approved by their banking supervisors and who have been able to successfully demonstrate that they will have sufficient financial strength to operate as usual under stressed scenarios, even after making their desired capital distributions. 

The Federal Reserve issued detailed instructions outlining the information they are requiring from the bank holding companies as well as the required timeframes.  There were two sets of instructions: one for the 19 firms that participated in the CCAR in 2011  and the other for the 12 additional BHC’s with at least $50 billion in assets that had not participated in previous supervisory stress test exercises .  The instructions included the Federal Reserve’s adverse stress scenario that is required to be used by all of the firms in this exercise and is designed to represent economic conditions that could occur in a prolonged global economic recession.

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In addition to the stress scenario provided by the Federal Reserve, the six largest firms  are also be required to estimate potential losses stemming from a hypothetical global market shock.  The global market shock is based on market price movements comparable to the second half of 2008, with adjustments made to incorporate potential sharp market price movements in European sovereign and banking sectors.

In an effort to improve transparency and market discipline, after evaluating each institution’s submissions, the Federal Reserve will then publish the results of each firm’s supervisory stress tests, including the market shock results for the six institutions with large trading operations.

Capital Plans Rule Regulatory Implementation Timeline

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Our Analysis

 
Bank holding company boards of directors and senior management will bear the ultimate responsibility for developing, implementing, and monitoring their firm’s capital planning strategies and internal capital adequacy process.  The CCAR process clearly delineates this responsibility and ties any dividend increase or other capital distribution squarely on the BHC’s ability to satisfy its regulators of the adequacy and comprehensiveness of its capital planning process.  The CCAR formally establishes common supervisory standards for large BHC capital planning and stress testing processes that large BHC’s will need to establish as business as usual practices going forward.

The Federal Reserve’s motivation is to attempt to avoid another 2008-style financial meltdown by forcing large BHC’s to hold sufficient capital to: maintain access to funding, continue to serve as credit intermediaries, meet their obligations to creditors and counterparties, and continue operations, even in an adverse environment.
 
While the stress tests are an important, public, and high-profile part of the CCAR process, the regulators will go further than this and will tie any perceived weakness in the BHC’s capital planning and/or capital adequacy process directly to the firm’s required level of capital, including dividends.  Critical to this will be the regulators perceptions of the BHC’s risk-measurement and risk-management capabilities, including the perceptions that are created during routine safety and soundness examinations, including Basel-specific related examinations.
 
The Federal Reserve will consider the overall comprehensiveness of the capital planning process, including the BHCs' ability to capture, measure, and estimate potential losses under stressed scenarios, from all of its material risks stemming from all of its activities.  They will assess the BHC's capital policies and procedures; the reasonableness of the assumptions and analysis supporting its capital adequacy assessment; its ability to maintain capital under stressful conditions; and the BHC’s degree of success in its implementing full compliance with Basel regulatory capital standards as they are implemented in the United States. The following table highlights some of the key capital planning expectations and considerations that boards of directors and senior management of the relevant BHC’s will want to make sure they’re properly able to address on an ongoing basis with their regulators.

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How Accenture Can Help – An Integrated Approach to Capital Planning

Successfully embedding capital planning into the bank holding company requires a common management framework driven top down from senior management that ensures that a robust and comprehensive capital planning process exists. 
Integrating the capital plans rule and CCAR process into business as usual will require an enterprise wide approach to capital planning.  Our detailed framework includes the following critical methodologies:

1. Identifying and Measuring Material Risks
  • Identify all material risks, risk mitigation techniques (including enforceability & effectiveness), diversifications & concentrations
     
  • Consider dependencies/contagion effects between risk types and effects of stress events to assumptions about portfolio and exposure behavior
     
  • Measure material risks quantitatively and qualitatively
     
  • Identify areas of uncertainty and bias in the risk measurement approach and reflect appropriate level of conservatism
     
  • Create a complete risk profile for the bank
2. Setting and Assessing Capital Adequacy Goals that Relate to Risk
  • Identify the appropriate measure of capital for capitalized risks
     
  • Evaluate capacity of bank’s capital to absorb different losses
     
  • Compare capital assessments to regulatory minimums, risk appetite, risk measures, volatility of capital requirements and other influences e.g. strategy, solvency standards, market/systemic events
     
  • Review capital needs through a defined cycle, considering downturn capital needs and capital raising lead times
3. Ensuring the Integrity of the Capital Planning Process
  • Ensure adequate validation, proper oversight, controls and documentation
     
  • Define processes for managing, monitoring, and refining the capital planning process through time
     
  • Identify deficiencies in current capital planning and create remediation actions
     
  • Ensure adequate engagement with the board of directors and senior management in development & review of the capital plan
     
  • Embed capital planning in business decision and risk management processes

How Stress Testing Fits in to the Capital Planning Process

While critical to get right, stress testing remains only a part of the overall capital planning process. 

Our integrated approach to stress testing holistically assesses how internal and external events create capital impacts across multiple risk dimensions which, when combined, result in more realistic outcomes than those foreseen under a more silo-based approach.

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CCAR Capital Planning as Business as Usual

Accenture’s approach to capital planning can help transform the CCAR stress testing process from an exercise in regulatory compliance into a value-enhancing capability, where risk management is used as a competitive differentiator to:

  • Align business strategy and risk capabilities to evaluate market options and drive profitable growth

  • Embed risk management capabilities across the organization to support a risk conscious capital planning process

  • Adapt to industry and geographic regulations in a holistic manner while focusing on business impacts and outcomes

  • Provide the capabilities to collect, model and  analyze business information for better risk-based capital planning

Key to creating this value enhancing capability is to ensure that the CCAR capital planning process becomes part of the firm’s business as usual. 

By turning the CCAR process from an annual exercise in regulatory compliance into a regular and important part of the company’s capital planning process, BHC’s can transform what would seem to be yet just another purely regulatory burden into a value generating proposition that helps mitigate risk while helping to drive shareholder value.

References and Further Reading

1. Federal Reserve Press Release and Relevant Attachments
2. Capital Plans Amendment to Regulation Y

About the Author

Jamie Marsh is an executive in Accenture’s risk management practice and has over 20 years of financial services experience, including as a bank examiner at the Federal Reserve Bank of Boston and at SunGard Brokerage Systems and Fidelity Investments.  He has received his CFA charter and Certified Investment and Fiduciary Risk designation and received his Masters in Finance from Brandeis University.

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¹ See http://www.federalreserve.gov/newsevents/press/bcreg/20111122a.htm

²  The 19 bank holding companies participating in the 2012 CCAR are: Ally Financial Inc., American Express Company, Bank of America Corporation, The Bank of New York Mellon Corporation, BB&T Corporation, Capital One Financial Corporation, Citigroup Inc., Fifth Third Bancorp, The Goldman Sachs Group, Inc., JPMorgan Chase & Co., Keycorp, MetLife, Inc., Morgan Stanley, The PNC Financial Services Group, Inc., Regions Financial Corporation, State Street Corporation, SunTrust Banks, Inc., U.S. Bancorp, and Wells Fargo & Company. These 19 firms also participated in the 2011 CCAR and the 2009 SCAP.

³ The 12 bank holding companies participating are: BBVA USA Bancshares Inc., BMO Financial Corp., Citizens Financial Group Inc., Comerica Inc., Discover Financial Services, HSBC North America Holdings Inc., Huntington Bancshares Inc., M&T Bank Corp., Northern Trust Corp., RBC USA Holdco Corp., UnionBanCal Corp., and Zions Bancorporation.

The Federal Reserve said it will publish next year the results of the tests for six banks that have large trading operations: Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo.

 

For more information, see section D - Federal Reserve Review of a Capital Plan, Capital Plans Amendment to Regulation Y

 

For more information, see section 4060.7.4 - Supervisory Approach to Evaluating Capital Adequacy Management, Federal Reserve BHC Inspection Manual

For additional information on Accenture’s capabilities, please contact:

Jamie Marsh 
Samantha Regan
Chis Porsena

This blog is produced by Accenture as general information on the subject. It is not intended to provide advice on your specific circumstances. If you require advice or further details on any matters referred to, please contact Accenture.  Accenture disclaims, to the fullest extent permitted by applicable law, any and all liability for the accuracy and completeness of the information in this document and for any acts or omissions made based on such information.
©2012 Accenture All Rights Reserved

 
 
 

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