United States

Recent CCAR submissions and lessons learned

INSIGHT ARTICLE  | 

The Comprehensive Capital Analysis and Review (CCAR) framework evaluates a bank holding company (BHC) and foreign banking organization's (FBO's) capital adequacy, capital adequacy process and its planned capital distributions, such as dividend payments and common stock repurchases. As part of the CCAR, the Federal Reserve evaluates whether BHCs and FBOs over $50 billion in U.S. assets have sufficient capital to continue operations throughout times of economic and financial market stress and whether they have robust, forward-looking capital planning processes that account for their unique risks.

The Federal Reserve may object to a BHC's capital plan based on either quantitative or qualitative grounds. If the Federal Reserve objects to a BHC's capital plan, the BHC may not make any capital distribution unless the Federal Reserve indicates in writing that it does not object to the distribution.

The 2015 CCAR submission results yielded several lessons that large financial institutions can leverage for more effective capital planning and success with future submissions.

Why is CCAR important?
Capital planning and adequacy are a critical element of a BHC and FBO's structure. During the financial collapse in the late 2000s caused by weaknesses in the economy and the structural soundness of the real estate market, several financial institutions faced severe capital challenges due to capital market sources drying up. As part of the CCAR, the Federal Reserve evaluates whether BHCs and FBOs have sufficient capital to continue operations throughout times of economic and financial market stress and whether they have robust, forward-looking capital planning processes that account for their unique risks.

Putting together strong capital plans along with the underlying detail and data is a very complex process, especially for large financial institutions. These capital plans along with the underlying detail, data and assumptions need to be effectively challenged across all three lines of defense and supported to prevent rejection or criticism by examiners.

CCAR and the DFAST connection
CCAR capital plans complement Dodd-Frank Act Stress Testing (DFAST) in two ways:

  1. The capital planning requirements are consistent with the Federal Reserve's obligations to impose enhanced capital and risk management standards on large financial firms ($50 billion or more in assets) under the Dodd-Frank Act.
  2. The Dodd-Frank Act mandates that the Federal Reserve conducts annual stress tests on all BHCs with $50 billion or more in assets to determine whether they have the capital needed to absorb losses in baseline, adverse and severely adverse economic conditions. These tests are integrated into the ongoing assessments of BHC and FBO capital required by the capital plan rule. As set forth in the law, the Federal Reserve is in charge of implementing the specific stress testing requirements of the Dodd-Frank Act. The Federal Reserve expects that the stress tests required per Dodd-Frank become an important component of the annual assessment of BHC and FBO capital plans.

CCAR 2015 submission summary results1
In the CCAR 2015, the Federal Reserve did not object to the capital plan and planned capital distributions for 29 of the 31 BHCs. The board of governors, however, objected to the capital plans of two top-50 U.S.-based BHCs due to widespread and substantial weaknesses across their capital planning processes. The board of governors issued a conditional non-objection to a top-50 BHC and required it to correct weaknesses in some elements of its capital planning process and to resubmit its capital plan by Sept. 30, 2015.

Lessons learned
The following two key lessons were learned as a result of feedback from the 2015 CCAR submissions:

  1. A BHC's capital planning process is the framework from which accurate projections on capital can be derived and as such needs to be robust with adequate governance, internal controls, risk identification and risk management, management information systems (MIS), and assumptions and analysis that support the BHC's and FBO's capital planning processes.
  2. Qualitative factors used for capital planning and stress testing practices including loss and revenue modeling practices need to be improved, better documented and supported.

Best-practice action steps for future submissions
BHCs and FBOs subject to CCAR need to improve their capital planning and stress testing practices as they move to a more mature model of CCAR compliance. Some best-practice action steps that these organizations need to consider include the following:

  • Set up a project management office to administer the plan for submission aligned with the stakeholders and the three lines of defense.
  • Risk management frameworks, including organizational and model risk management structures, policies and procedures, process and systems maps with documented controls and data availability and quality need to be improved.
  • MIS architecture for systems and capital planning models and the underlying qualitative assumptions need to be better documented and validated and provide a clear and accurate audit trail to third-party reviewers.
  • Enabling the three lines of defense to drive true effective challenge around processes, systems and outputs is very important. Internal audit plays a critical role in effective challenge and should be involved early on in the planning process to validate the design of the CCAR process along with the adequacy of controls and the expectations around audit trail and documentation. This is especially important when coming up with qualitative factors for capital planning and stress testing.
  • Material risk identification needs to be dynamic to constantly obtain information on the BHC or FBO based on those organizations' market profile, customer base and products and services. This dynamic risk identification needs to be integrated with any on-going CCAR exercises.

It is expected that the CCAR framework will continue to evolve as the economic environment and capital demands change.  To continue demonstrating strong capital planning processes, BHCs and FBOs should continuously evaluate lessons learned from the past, and consider implementing process improvement changes prior to future submissions.

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