We have prepared visuals (available here) of the 2014 Comprehensive Capital Analysis and Review (“CCAR“) and Dodd-Frank Act Stress Test (“DFAST“) results. Update: The visuals have been updated to include the company-run DFAST results.
Background on DFAST: Pursuant to its DFAST regulations, the Federal Reserve conducts annual supervisory stress tests to assess the potential impact of various hypothetical economic scenarios on the consolidated earnings, losses and regulatory capital of each U.S. bank holding company with $50 billion or more in total consolidated assets (“Large BHC“) over a nine-quarter planning horizon. As part of the supervisory DFAST, the Federal Reserve projects each Large BHC’s balance sheet, net income, and resulting post-stress capital levels, regulatory capital ratios, and a Tier 1 Common risk-based capital ratio under three scenarios (baseline, adverse and severely adverse) using data as of September 30. Our visuals of the Federal Reserve’s 2014 stress test scenarios are available here.
The DFAST regulations also require Large BHCs as well as U.S. banking organizations with >$10 billion and < $50 billion in total consolidated assets (“mid-size banking organizations“) to conduct company-run DFASTs. Specifically, Large BHCs must conduct two company-run DFASTs each year. In contrast, mid-size banking organizations are required to conduct one company-run DFAST each year. Our comparison of DFAST requirements for large and mid-size banking organizations is available here.
Background on CCAR: CCAR is an annual exercise by the Federal Reserve to assess whether Large BHCs have sufficient capital to continue operations during the upcoming two-year period assuming economic and financial stress and have robust, forward-looking capital planning processes that account for their risks and are supported by the Large BHCs’ risk measurement and management practices. As part of CCAR, the Federal Reserve qualitatively and quantitatively evaluates each Large BHC’s plans to make capital distributions, such as dividend payments, stock repurchases or planned acquisitions.
Differences Between Supervisory DFAST and CCAR Post-Stress Capital Analysis: While closely related, there are some important differences between the Federal Reserve’s supervisory DFAST and the CCAR post-stress capital analysis. While the supervisory DFAST and CCAR quantitative assessment incorporate the same projections of pre-tax net income, the primary difference is the capital action assumptions that are combined with these projections to estimate a Large BHC’s post-stress capital levels and ratios.
To project post-stress capital ratios for the supervisory DFAST, the Federal Reserve uses a standardized set of capital action assumptions that are specified in its DFAST regulations. Common stock dividend payments are assumed to continue at the same level as the previous year. Scheduled dividend, interest, or principal payments on any other capital instrument eligible for inclusion in the numerator of a regulatory capital ratio are assumed to be paid. The assumptions are that repurchases of common stock are zero. The capital action assumptions do not include issuance of new common stock, preferred stock, or other instruments that would be included in regulatory capital, except for common stock issuance associated with expensed employee compensation.
In contrast, for the CCAR post-stress capital analysis, the Federal Reserve uses a Large BHC’s planned capital actions, and assesses whether the Large BHC would be capable of meeting supervisory expectations for minimum capital ratios even if stressful conditions emerged and the Large BHC did not reduce planned capital distributions.
As a result, post-stress capital ratios projected for the supervisory DFAST may differ significantly from those for the CCAR post-stress capital analysis.