None of the 18 banks whose capital plans are subject to the Federal Reserve’s comprehensive capital analysis and review (CCAR) received objections this year, but the Fed issued a “conditional non-objection” for Credit Suisse and said it must address certain limited weaknesses in its capital planning processes.
The Fed on Thursday said that on balance, virtually all firms are now meeting the Federal Reserve’s capital planning expectations, which is an improvement from last year’s assessment. “The firms in the test have significantly increased their capital since the first round of stress tests in 2009,” it said. “In particular, the largest and most complex banks have more than doubled their common equity capital from around $300 billion to roughly $800 billion during that time.”
Regarding Credit Suisse, the Fed’s CCAR report says the central bank identified weaknesses in the firm’s capital adequacy process that can be addressed in the near term. “Specifically, the Federal Reserve identified weaknesses in the assumptions used by the firm to project stressed trading losses that raise concerns about the firm’s capital adequacy and capital planning process.”
It added: “As a condition of not objecting to Credit Suisse’s capital plan, the Board is requiring the firm to address the weaknesses noted above by October 27, 2019. In addition, until the firm satisfactorily addresses the identified weaknesses, the Board is restricting the firm’s planned capital distributions to the amount that the firm was authorized to pay from July 1, 2018, through June 30, 2019.”
CCAR evaluated the capital planning processes and capital adequacy of 18 of the largest banking firms, including the firms’ planned capital actions, such as dividend payments and share buybacks. Strong capital levels act as a cushion to absorb losses and help ensure that banking organizations have the ability to lend to households and businesses even in times of stress.
The Fed Board considers both quantitative and qualitative factors when evaluating a bank’s capital plan. Quantitative factors include a bank’s projected capital ratio under a hypothetical severe recession. Qualitative factors include the firm’s capital planning process, including its risk management, internal controls, and governance practices.
Only firms that have been in CCAR for less than four years are subject to an objection on qualitative grounds, it said.
Under a rule change approved in March, and which was effective for this year’s CCAR, 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. Only five firms potentially faced a qualitative objection this year. Those excluded from the possibility included 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 use of the qualitative objection will be fully phased out by 2021.