Today, the Federal Reserve announced that results of the Dodd-Frank supervisory stress tests conducted by the Federal Reserve of 18 large bank holding companies (BHCs) will be released on Thursday, March 7 at 4:30 p.m. Eastern Time. The Federal Reserve also announced that results of the 2013 Comprehensive Capital Analysis and Review (CCAR) will be released on Thursday, March 14 at 4:30 p.m. Eastern Time.
Background on Dodd-Frank Supervisory Stress Tests: The Dodd-Frank Act requires the Federal Reserve to conduct an annual supervisory stress test of U.S. BHCs with $50 billion or more in total consolidated assets and nonbank financial companies designated as systemically important by the Financial Stability Oversight Council (collectively, “covered companies”). The Dodd-Frank Act also requires covered companies to conduct their own company-run stress tests semi-annually.
Under the Federal Reserve’s Dodd-Frank stress test regulations, only the 18 BHCs that participated in the 2009 Supervisory Capital Assessment Program (SCAP) are subject to Dodd-Frank supervisory and company-run stress testing requirements during the current stress test cycle that began in October 2012. Other BHCs with $50 billion or more in total consolidated assets will become subject to Dodd-Frank stress testing requirements in the next stress test cycle that will begin in October 2013.
The Dodd-Frank supervisory stress test results to be published by the Federal Reserve on March 7 will include data such as projected capital ratios, revenue and loss estimates under a severely adverse scenario and assuming a common set of standardized capital actions that is used in the analysis of all 18 BHCs. The standardized capital actions assume no changes in recent levels of dividend payments and no common stock repurchases.
Background on CCAR: CCAR is an annual exercise by the Federal Reserve to help assess whether the largest 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 unique risks and are supported by the BHCs’ risk-measurement and -management practices. As part of the CCAR, the Federal Reserve evaluates each large BHC’s plans to make capital distributions, such as dividend payments, stock repurchases or planned acquisitions.
Differences Between Dodd-Frank Supervisory Stress Test and CCAR Post-Stress Capital Analysis: The primary difference between the Dodd-Frank supervisory stress tests and the CCAR post-stress capital analysis is the capital action assumptions that are combined with these projections to estimate post-stress capital levels and ratios.
To project post-stress capital ratios for the Dodd-Frank supervisory stress tests, the Federal Reserve uses a standardized set of capital action assumptions that are specified in the Dodd-Frank stress test regulations. In contrast, for the CCAR post-stress capital analysis, the Federal Reserve uses BHCs’ planned capital actions and assesses whether a BHC would be capable of meeting supervisory expectations for minimum capital ratios even if stressful conditions emerged and the BHC did not reduce planned capital distributions.