government building


CCAR: A mixed story of surprises and more work to do

The Federal Reserve (Fed) released the results of its Comprehensive Capital Analysis and Review (CCAR) for 2018 on June 28. The results cover 35 bank holding companies (BHCs) and Intermediate Holding Companies (IHCs¹) subject to the capital planning and stress test rule.

June 29, 2018 | Financial services

In addition to the stress test results, the conclusions on the adequacy of the capital planning process for the 18 systemic and complex firms subject to the qualitative portion of the review are also provided.2

Key facts:
  • The Fed objected to one firm, Deutsche Bank USA, on qualitative grounds, and granted conditional non-objections for three firms, Goldman Sachs, Morgan Stanley, and State Street.
  • A record number of firms, six, adjusted their dividend or stock buy-back requests to avoid objection, the so-called mulligan, exceeding the prior record of four firms making adjustments in 2015 (see below).
  • Capital planning internal controls in many instances continue to fall below the Federal Reserve’s supervisory expectations.

The prior week’s release of the Dodd-Frank Act Stress Test (DFAST) results provided more detailed information on the Fed’s stress test. Compared to CCAR, those results exclude buybacks and capital issuances and hold past common dividends constant. A link to our take on the DFAST results can be found here.

Key takeaways

  • More remediation work is required to satisfy the Fed in multiple areas. The Fed noted that several firms continue to fall short in the following areas:
    • Internal controls: In many instances firms’ internal controls around capital planning fall below supervisory expectations including:
      • Insufficient investment in information systems and data management efforts;
      • Poorly constructed and/or executed capital planning audits, and;
      • Ineffective model risk management functions
    • Stress loss forecasting: Inability to incorporate changing market dynamics, lack of access to relevant data, and weak judgement-based estimation approaches particularly for credit cards, auto loans, and revenues from certain business lines.
    • Trading strategy vulnerabilities: Several firms purchased large trading positions to hedge against a global market shock but may have not adequately taken into account or analyzed execution risk or communicated that risk to their boards.

The breadth and depth of the noted deficiencies suggests the Fed will be issuing to firms a number of matters requiring attention and expecting institutions to put together concrete remediation plans.

  • Quantitative exceptions signal new flexibility. No firms received a quantitative objection; however, three firms, (Goldman Sachs, Morgan Stanley, and State Street) each fell slightly below minimum capital requirements under stress. The Fed employed conditional non-objections for these firms on the basis that their ratios were affected by various one-time and uncertain factors related to the Tax Cuts and Jobs Act (TCJA).
  • Capital actions continue to matter. As in previous years, the requested capital actions have a material influence on minimum post-stress ratios for most firms, and this year requested capital actions trimmed capital ratios by 1.6 percentage points compared to the DFAST results that use historical dividend averages.
  • Dress rehearsals pay off. Last year, six IHCs underwent a dress rehearsal for CCAR and received examiner feedback before undergoing this years’ public version. Five of the six were able to make sufficient enough progress in their capital planning and stress testing processes to pass this year, marking a significant milestone in their progression as IHCs. As longstanding CCAR participants have experienced, continuous improvement and meeting commitments will be key to ensure next year is also a success. For IHCs, sustained and ongoing support for these efforts from the parent will be key.
  • Next year quantitative objections may be a thing of the past. In April, the Fed proposed a number of changes to its Basel III and capital planning and stress testing rules that would push stress test results into ongoing capital requirements.

Summary of CCAR results for severely adverse scenario

Aggregate results and buffers over minimums

In aggregate, stress minimums were well above minimum regulatory requirements as shown below.

The size of buffers over minimum requirements varied widely across banks as illustrated below for the Common Equity Tier 1 capital ratio, sorted in descending stress minimum ratio order. The dark blue portion of the bar indicates the degree of stress impact on the actual starting capital ratio.

Similarly for the 18 firms subject to the supplementary ratio, there were widely disparate amounts of headroom above the ratios, as shown by the blue bars. These stress minimums were lower than for the 2017 results, the green bar, as shown for firms that also participated in last year’s CCAR.

Capital actions matter

The Fed stress tests include the conservative assumption that historical or requested capital distributions under normal conditions will also continue during stress. While DFAST incorporates the assumption that dividends will be maintained at the same rate as in the prior four quarters, CCAR results include firm requests for dividend increases and stock buy backs. Consequently, stress capital ratios can be lower in the CCAR results due to these potentially higher capital distribution levels.

  • In aggregate, the effect on common equity Tier 1 of requested capital actions was a reduction in the minimum ratio of 1.6 percentage points, compared to 2.0 percentage points in 2017, 1.3 percentage points for 2016, and 1.0 percentage point in 2015.
  • The amount of capital action impact varied widely across firms, with 22 firms trimming their capital by 1.0 percentage point or more.
  • While the capital action impact in aggregate was down compared to 2017, 18 firms’ capital requests had a higher trimming effect than in 2017.

Strong capital requests, the greater severity of the scenario and new tax law effects all served to reverse the leveling or improving trends in post stress minimums, while still remaining well above minimum requirements.

What is in store for CCAR next year?

Transformation of CCAR in 2019

The Federal Reserve proposed significant changes to both the capital rules and the CCAR process in its notice of proposed rulemaking in April of 2018. In essence, the proposal would:

  • Eliminate the CCAR quantitative objection in favor of taking the Fed’s stress test results and incorporating them directly into each firm’s day-to-day capital requirements. Under this approach, the Basel III generic capital conservation buffer of 2.5 percent would be replaced with a “stress capital buffer (SCB)” based on the Fed’s annual stress test results.3 Firms would be required to keep their actual capital at or above the buffer level over the course of the year, or risk having their capital distributions curtailed or undergo other limiting actions. For the eight firms that also have the surcharge buffer for Global Systemically Important Banks (GSIBs), they would also need to operate at or above both the GSIB buffer and the SCB. Each year a refreshed SCB would be provided to firms based on the annual Fed stress test calculations.
  • Reduce the severity of the test by removing several conservative assumptions. These changes include allowing capital buy backs and dividends to be scaled back under stress as well as assuming flat growth in assets, thereby reducing pressure on capital ratios significantly.
  • Eliminates the adverse scenario from CCAR and the SCB, which is consistent with changes in the recently passed banking legislation, 2155, Economic Growth, Regulatory Reform, and Consumer Protection Act “EGRRCPA”
  • Effectively eliminates stress requirements for the SLR. Under the proposal, no stress capital buffer sized from the stress tests would be maintained for the SLR. A standard buffer would be maintained and calibrated off of a firm’s GSIB buffer.
  • Tailoring of CCAR. Under the proposal, capital plans would continue to be submitted and qualitative reviews would continue to be conducted. However, the new legislation EGRRCPA has raised the threshold for application of enhanced prudential standards for domestic BHCs from $50 billion to $100 billion in assets. Consequently the Fed has removed three firms from both DFAST and CCAR. In addition, EGRRCPA raises the threshold for domestic BHCs up to $250 billion in 18 months from passage, but allows the Fed to decide if certain firms still merit inclusion. Consequently, the Fed will need to make tailoring decisions for that group of roughly a dozen firms, though notably they are already currently excluded from the qualitative aspects of CCAR. Further, the EGRRCPA also requires the Fed to continue its own periodic stress tests of all firms above the $100 billion threshold.
  • Going forward. Regardless of how the qualitative portion of CCAR may be modified or tailored, examiners will be reviewing the strength of capital planning processes in one forum or another. In fact, the Fed’s new proposed rating system includes an explicit rating covering capital governance and planning processes. They will be evaluating past remediation efforts and issuing new matters requiring attention as new issues are uncovered. The Fed’s list of outstanding shortfalls suggest the need for sustaining momentum in the areas of loss forecasting, data quality, model risk management, and internal audit, among others. In addition, firms not subject to the Fed’s CCAR qualitative review are nevertheless undergoing capital planning horizontals as part of their ongoing supervision. Maintaining a focus on remediation will be paramount to enter a more sustainable and cost effective phase of capital planning.
Shift to efficiency, robotics, and operational excellence

As we noted last year, after the intensive build stage for capital planning, institutions are ready to pivot to a more sustainable and efficient program that fits more seamlessly into an institution’s business-as-usual operations. Increasingly, firms are taking a step back to look at what they have built and are rationalizing the number of steps, handoffs, and overall complexity, with an eye toward streamlining and automating where possible. Several firms are taking a disciplined look at business process improvement and experimenting with the use of robotics in ways that can reduce the likelihood of operational error, reduce costs, and produce more reliable results.

Given that capital is one of the Fed’s four fundamental pillars of its supervisory framework, institutions will need to further mature their current approaches. Institutions that transition their efforts from project mode to a business as usual process for risk management, governance and financial monitoring will bring a continued process improvement to their institutions that will help them identify and manage emerging risks and issues.

Sources of data utilized within this document from the Board of Governors of the Federal Reserve System are listed below.

  1. Comprehensive Capital Analysis and Review 2018: Assessment and Framework and Results, June 2017
  2. Comprehensive Capital Analysis and Review 2017: Assessment and Framework and Results, June 2017
  3. Comprehensive Capital Analysis and Review 2016: Assessment and Framework and Results, June 2016
  4. Comprehensive Capital Analysis and Review 2015: Assessment and Framework and Results, March 2015
  5. Comprehensive Capital Analysis and Review 2014: Assessment and Framework and Results, March 2014
  6. Comprehensive Capital Analysis and Review 2013: Assessment and Framework and Results, March 2013
  7. Comprehensive Capital Analysis and Review 2012: Methodology and Results for Stress Scenario Projections, March 13, 2012

1 Six IHCs were added for this year’s DFAST: Barclays, Credit Suisse, UBS, RBC, Deutsche Bank USA, and BNP Paribas. Both Deutsche Bank USA and BNP Paribas subsumed BHC subsidiaries of their parent organizations that were previous filers, Deutche Bank TC and BancWest, respectively.

2 See appendix for list of firms subject to CCAR, including those subject to qualitative reviews.

3 The Basel III buffer of 2.5 percent would serve as a floor if the SCB fell below that amount.

4 Systemic firms supervised by the Large Institutions Supervision Coordinating Committee (LISCC) and Large Complex Firms (LCFs) with average consolidated assets of more than $250 billion, on-balance sheet foreign exposure of $10 billion or more, or average nonbank assets in excess of $75 billion.

5 Large Noncomplex Firms (LNFs) with consolidated average assets equal to or greater than $50 billion but less than $250 billion, on-balance sheet foreign exposure of less than $10 billion, nonbank assets less than $75 billion, and not a LISCC firm.

6 Firms meeting the advanced approaches capital framework criteria are subject to the supplementary leverage ratio beginning in 1Q 2018, and are required to incorporate that ratio under stress starting for that forecast period and beyond.

This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.

Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.

Contact us

David Wright
Managing director
Deloitte Risk and Financial Advisory

Deloitte & Touche LLP


Craig Brown
Managing director

Deloitte Risk and Financial Advisory
Deloitte & Touche LLP


Fullwidth SCC. Do not delete! This box/component contains JavaScript that is needed on this page. This message will not be visible when page is activated.

Site-within-site Navigation. Do not delete! This box/component contains JavaScript that is needed on this page. This message will not be visible when page is activated.

Did you find this useful?