Capital Planning at Large Bank Holding Companies: Supervisory Expectations and Range of Current Practice

Publisher Marketing: The Federal Reserve has previously noted the importance of capital planning at large, complex bank holding companies (BHCs). Capital is central to a BHC's ability to absorb unexpected losses and continue to lend to creditworthy businesses and consumers. It serves as the first line of defense against losses, protecting the deposit insurance fund and taxpayers. As such, a large BHC's processes for managing and allocating its capital resources are critical not only to its individual health and performance, but also to the stability and effective functioning of the U. S. financial system. The Federal Reserve's Capital Plan Rule and the associated annual Comprehensive Capital Analysis and Review (CCAR) have emphasized the importance the Federal Reserve places on BHCs' internal capital planning processes, and on the supervisory assessment of all aspects of these processes, which is a key element of a supervisory program that is focused on promoting resiliency at the largest BHCs. These initiatives have focused not just on the amount of capital that a BHC has, but also on the internal practices and policies a firm uses to determine the amount and composition of capital that would be adequate, given the firm's risk exposures and corporate strategies as well as supervisory expectations and regulatory standards. BHCs have long engaged in some form of capital planning to address the expectations of shareholders, creditors, customers, and other stakeholders. The Federal Reserve's interest in and expectations for effective capital planning reflect the importance of the ongoing viability of the largest BHCs even under stressful financial and economic conditions. Robust internal capital planning can also help ensure that BHCs have sufficient capital in a broad range of future macroeconomic and financial market environments by governing the capital actions-including dividend payments, share repurchases, and share issuance and conversion- a BHC takes in these situations. The Federal Reserve's Capital Plan Rule requires all U. S.-domiciled, top-tier BHCs with total consolidated assets of $50 billion or more to develop and maintain a capital plan supported by a robust process for assessing their capital adequacy. CCAR is the Federal Reserve's supervisory program for assessing the capital plans. In 2013, CCAR covered 18 BHCs that participated in the 2009 Supervisory Capital Assessment Program (SCAP). The Federal Reserve's assessment of a BHC's capital planning process includes an evaluation of the risk-identification, -measurement, and -management practices that support the BHC's capital planning and stress scenario analysis, an assessment of stressed loss and revenue estimation practices, and a review of the governance and controls around these practices. The preamble to the Capital Plan Rule outlines the elements on which the Federal Reserve evaluates the robustness of a BHC's internal capital planning-also referred to as the capital adequacy process, or "CAP." This publication describes the Federal Reserve's expectations for internal capital planning at the large, complex BHCs subject to the Capital Plan Rule in light of the seven CAP principles. It expands on previous articulations of these supervisory expectations by providing examples of observed practices among the BHCs participating in CCAR 2013 and by highlighting those practices considered to be stronger or leading practices at these firms. In addition, it identifies practices that the Federal Reserve deems to be weaker, or in some cases unacceptable, and thus in need of significant improvement. However, practices identified in this publication as leading or industry best practices should not be considered a safe harbor. The Federal Reserve anticipates that leading practices will continue to evolve as new data become available, economic conditions change, new products and businesses introduce new risks, and estimation techniques advance further.