For 13 big financial firms, Fed won’t use ‘qualitative objection’ in 2019 CCAR cycle; full phase-out by 2021

Thirteen of the 18 financial firms subject to the Comprehensive Capital Analysis and Review (CCAR) exercise in 2019 need not worry about a potential “qualitative objection” from the Federal Reserve in this cycle, as the Fed Board – citing improvements by the largest firms’ in their capital planning – voted 4-1 Tuesday to limit the use of the objection.

A final rule implementing this change notes that except for certain firms that have received a qualitative objection in the immediately prior year, the Fed Board will no longer issue a qualitative objection to any firm effective Jan. 1, 2021.

Fed Gov. Lael Brainard voted against issuing the final rule.

For the largest and most complex firms, CCAR includes both a quantitative evaluation of a firm’s capital adequacy under stress and a qualitative evaluation of its abilities to determine its capital needs on a forward-looking basis. Generally, a firm must pass both the quantitative and qualitative evaluation or the Fed Board may object and restrict the firm’s shareholder distributions.

A firm must participate in four CCAR exercises and successfully pass the qualitative evaluation in the fourth year to no longer be subject to a potential qualitative objection. If it does not pass in its fourth year, it remains subject to a possible qualitative objection until it passes, the Fed said. Of the five firms that could receive this objection in 2019, one of them – TD Bank – is now in its fourth year of CCAR. The other four – Barclays US LLC, Credit Suisse Holdings (USA), DB USA Corporation, and UBS Americas Holdings LLC – will be in their fourth year of CCAR in 2020.

Firms not subject to the qualitative objection in 2019 include  Bank of America Corporation, The Bank of New York Mellon Corporation, Capital One Financial Corporation, Citigroup Inc., The Goldman Sachs Group, Inc., HSBC North America Holdings Inc., JPMorgan Chase & Co., Morgan Stanley, Northern Trust Corporation, The PNC Financial Services Group, Inc., State Street Corporation, U.S. Bancorp, or Wells Fargo & Company.

The Fed said all firms will remain subject to a “rigorous evaluation”of their capital planning processes. “Firms with weak practices may be subject to a deficient supervisory rating, and potentially an enforcement action, for failing to meet supervisory expectations,” it said. “In addition, all firms remain subject to a potential objection on quantitative grounds.”

The Fed also released the instructions for this year’s CCAR exercise. Of the 18 firms subject to the exercise, 11 with large trading operations will be required to factor in a global market shock as part of their scenarios; 13 firms with substantial trading or processing operations will also be required to incorporate a counterparty default scenario, the board said.

The Fed on Tuesday also voted (again, 4-1) to keep the countercyclical capital buffer at 0%.

Federal Reserve Board announces it will limit the use of the “qualitative objection” in its Comprehensive Capital Analysis and Review (CCAR) exercise, effective for the 2019 cycle

RR: Fed Board votes to keep countercyclical capital buffer (CCyB) at 0% (March 7, 2019)