Today, the Federal Reserve published a paper entitled Capital Planning at Large Bank Holding Companies: Supervisory Expectations and Range of Current Practice. The paper is intended to promote better capital planning at large bank holding companies (BHCs) and to provide greater clarity on the standards against which those practices are evaluated as part of the Federal Reserve’s annual Comprehensive Capital Analysis and Review (CCAR).
The paper discusses the Federal Reserve’s expectations for capital planning at large BHCs and described the range of practices it has observed at these companies during the past three CCAR exercises. The Federal Reserve emphasized that its assessments under CCAR focus not just on the amount of capital that a BHC has, but also on the internal practices and policies a BHC uses to determine the amount and composition of capital that would be adequate, given the BHC’s risk exposures and corporate strategies as well as supervisory expectations and regulatory standards.
Areas for Improvement: According to the Federal Reserve, large BHCs have considerably improved their capital planning processes in recent years, but have more work to do to enhance their practices for assessing the capital they need to withstand stressful economic and financial conditions. The Federal Reserve noted the following areas where some BHCs continue to fall short of leading practice:
- not being able to show how all their risks were accounted for in their capital planning processes;
- using stress scenarios and modeling techniques that did not address the particular vulnerabilities of the BHC’s business model and activities;
- generating projections for at least some components of loss, revenue, or expenses using approaches that were not robust, transparent, and/or repeatable, or that did not fully capture the impact of stressed conditions;
- having capital policies that did not clearly articulate a BHC’s capital goals and targets, did not provide analytical support for how these goals and targets were determined to be appropriate, and/or were not comprehensive or detailed enough to provide clear guidance about how the BHC would respond as its capital position changed in different economic circumstances; and
- having less-than-robust governance or controls around the capital planning process, including around fundamental risk identification, measurement and management practices that are among the critical elements that support robust capital planning.
Tailored Expectations: The Federal Reserve also noted that it has tailored expectations for BHCs of different sizes, scope of operations, activities and systemic importance in various aspects of capital planning. For example, the Federal Reserve has significantly heightened supervisory expectations for the largest and most complex BHCs—in all aspects of capital planning—and expects these BHCs to have capital planning practices that are widely considered to be leading practices. In addition, the Federal Reserve recognizes the challenges facing BHCs that are new to CCAR and further recognizes that these BHCs will continue to develop and enhance their capital planning systems and processes to meet supervisory expectations.
New CCAR Participants in 2014: The Federal Reserve will start the 2014 CCAR process in the fall. In addition to the 18 BHCs that participated in 2013, 12 additional BHCs with more than $50 billion in total assets will, for the first time this year, participate in the CCAR.
Federal Reserve, Capital Planning at Large Bank Holding Companies: Supervisory Expectations and Range of Current Practice (Aug. 2013) available here: http://www.federalreserve.gov/bankinforeg/bcreg20130819a1.pdf