Comprehensive Capital Analysis and Review or CCAR is a Capital Planning exercise involving Large US Bank holding companies (BHC’s Complex and Non Complex) and foreign firms with Large US operations also known as the Intermediate Bank holding Companies (IHC’s) .CCAR assessment includes quantitative and qualitative assessments of firms capital plans. Quantitative assessment includes supervisory and company run stress tests.
Through these stress test the U.S. Federal Reserve expects the participating firms to be sufficiently capitalized in adverse operating environments and also continue to carry on normal business activities like lending and also meet obligation of its counterparties.

The CCAR Capital plan for this year needs to be submitted by the participants to the Fed by 5th April 2018 and the results will be announced by the Fed on 30th June 2018. The participants of 2018 CCAR exercise include:

  • 18 of the large US Bank holding companies will be subject to qualitative and quantitative disclosures .This includes 5 large Foreign Banks with large US operations
  • 20 Bank holding companies with less complex operations will be subject to only Quantitative disclosures

This also includes one foreign firm with US operations

What Continues with CCAR

  • Firm’s capital plan submissions
  • Expectations regarding the mandatory elements of a capital plan like capital management, a process to ascertain capital adequacy, capital policy and business plan changes
  • Qualitative assessment of a firm’s capital plan (LISCC* and large and complex firms only)
  • Quantitative assessment of a firm’s post-stress capital adequacy
  • Federal Reserve’s response to a firm’s capital plan and planned capital actions
  • Limited adjustments that a firm may make to its planned capital actions
  • Public disclosures by the Federal Reserve at the end of the CCAR exercise

What are incremental changes in 2018?

  • Non advanced approaches firms are required to continue to apply the transition provisions applicable for calendar year 2017 for certain items (i.e., mortgage servicing assets, certain deferred tax assets,

investments in the capital instruments of unconsolidated financial institutions, and minority interest) over the nine-quarter planning horizon.

  • Impact of the Tax Cut and Jobs Act: to be reflected in CCAR 2018 projections, as applicable
  • Market Risk Component changes for certain IHC’s in lieu of the global market shock component, IHCs will be subject to interim market risk components in the supervisory adverse and severely adverse scenarios used in the annual company-run stress test (company-run market risk component) and the supervisory stress test (supervisory market risk component)
  • Attestation requirements for LISCC firms – LISCC firms that are BHCs must attest to the effectiveness of internal controls for FR Y-14 Submissions
  • Limited adjustments to planned capital actions – Before the final results are published Fed will provide an opportunity to make onetime adjustments
  • Reduced supporting documentation for LISCC and large and complex firms

Impact of the Changes

Most of the CCA instructions and scenarios are in line with earlier guidelines and limit the impact of the exercise on the participating banks, however some of the additional changes suggested in 2018 guidelines may have following impacts on the CCAR participants

  • Severe scenarios are included which require firms to reflect the recent tax law changes in their projections of net income and regulatory capital .From a stress testing perspective banks will no longer

be able to offset the stress losses with projected tax refunds, as a result, this will impact the capital. 

  • Relief for 20 CCAR participants in the category of large and Non Complex as they will not receive objections to their capital plan based on qualitative assessments
  • Addition of 6 IHC’s in thisyear’sCCAR stress test .Out of these 5 will also be submitting qualitative assessment to Fed and 4 (LISCC) from the list will also be subject to Fed heightened expectations.Also, it is observed that new entrants generally have a high probability of receiving MRA’s (matters requiring attention) or MRIA’s (matters requiring immediate attention) initially, till they mature on the CCAR best practices.
  • Reduced documentation – Fed will inform the CCAR participants who are subject to the qualitative submissions a month before on what are the in-scope supporting documentation, though the impact of this is minimal as firms still have to prepare exhaustive documentation ,but from an examination perspective it will help them to be better prepared and provide more focus on in scope topics
  • Opportunity to address capital deficiency –This is more important for the IHC’s as the Fed will give theman opportunity to supplement any capital deficiencies observed after running the stress tests. The IHC’scan get the necessary equity capital supplements from their parent to address this deficiency which will also helps them to avoid over capitalizing their US firms going forward

CCAR exercise continues to widen its net of participating banks and this year we will see the entry of 6 IHC’s who will be part of public disclosures for the first time since their private submissions to fed last year. This year’s CCAR submission will see more impact on IHC’s as they are very new to the rigor of CCAR exercise, but the good part is that they can leverage the Prior learnings of existing CCAR participants and work towards making their qualitative and quantitative CCAR submissions complete in all aspects.

Ajay Katara

Ajay Katara

Ajay Katara is a Domain Consultant with the Risk Management practice of the Banking and Financial Services (BFS) business unit at Tata Consultancy Services (TCS). He currently leads the BFS Risk Practice’s portfolio on Regulations and Robotics Process Automation. He has extensive experience of more than 13 years in Consulting

Solution design space cutting across CCAR Consulting, AML, Basel II implementation and credit risk, and has worked with several financial enterprises across geographies. He has significantly contributed to the conceptualization of strategic offerings in the risk management space and has been instrumental in successfully driving various consulting engagements. He has also authored many editorials, details of which can be found in his linked in profile (https://www.linkedin.com/in/ajaykatara/)

Comprehensive Capital Analysis and Review or CCAR is a Capital Planning exercise involving Large US Bank holding companies (BHC’s Complex and Non Complex) and foreign firms with Large US operations also known as the Intermediate Bank holding Companies (IHC’s) .CCAR assessment includes quantitative and qualitative assessments of firms capital plans. Quantitative assessment includes supervisory and company run stress tests.
Through these stress test the U.S. Federal Reserve expects the participating firms to be sufficiently capitalized in adverse operating environments and also continue to carry on normal business activities like lending and also meet obligation of its counterparties.

The CCAR Capital plan for this year needs to be submitted by the participants to the Fed by 5th April 2018 and the results will be announced by the Fed on 30th June 2018. The participants of 2018 CCAR exercise include:

  • 18 of the large US Bank holding companies will be subject to qualitative and quantitative disclosures .This includes 5 large Foreign Banks with large US operations
  • 20 Bank holding companies with less complex operations will be subject to only Quantitative disclosures

This also includes one foreign firm with US operations

What Continues with CCAR

  • Firm’s capital plan submissions
  • Expectations regarding the mandatory elements of a capital plan like capital management, a process to ascertain capital adequacy, capital policy and business plan changes
  • Qualitative assessment of a firm’s capital plan (LISCC* and large and complex firms only)
  • Quantitative assessment of a firm’s post-stress capital adequacy
  • Federal Reserve’s response to a firm’s capital plan and planned capital actions
  • Limited adjustments that a firm may make to its planned capital actions
  • Public disclosures by the Federal Reserve at the end of the CCAR exercise

What are incremental changes in 2018?

  • Non advanced approaches firms are required to continue to apply the transition provisions applicable for calendar year 2017 for certain items (i.e., mortgage servicing assets, certain deferred tax assets,

investments in the capital instruments of unconsolidated financial institutions, and minority interest) over the nine-quarter planning horizon.

  • Impact of the Tax Cut and Jobs Act: to be reflected in CCAR 2018 projections, as applicable
  • Market Risk Component changes for certain IHC’s in lieu of the global market shock component, IHCs will be subject to interim market risk components in the supervisory adverse and severely adverse scenarios used in the annual company-run stress test (company-run market risk component) and the supervisory stress test (supervisory market risk component)
  • Attestation requirements for LISCC firms – LISCC firms that are BHCs must attest to the effectiveness of internal controls for FR Y-14 Submissions
  • Limited adjustments to planned capital actions – Before the final results are published Fed will provide an opportunity to make onetime adjustments
  • Reduced supporting documentation for LISCC and large and complex firms

Impact of the Changes

Most of the CCA instructions and scenarios are in line with earlier guidelines and limit the impact of the exercise on the participating banks, however some of the additional changes suggested in 2018 guidelines may have following impacts on the CCAR participants

  • Severe scenarios are included which require firms to reflect the recent tax law changes in their projections of net income and regulatory capital .From a stress testing perspective banks will no longer

be able to offset the stress losses with projected tax refunds, as a result, this will impact the capital. 

  • Relief for 20 CCAR participants in the category of large and Non Complex as they will not receive objections to their capital plan based on qualitative assessments
  • Addition of 6 IHC’s in thisyear’sCCAR stress test .Out of these 5 will also be submitting qualitative assessment to Fed and 4 (LISCC) from the list will also be subject to Fed heightened expectations.Also, it is observed that new entrants generally have a high probability of receiving MRA’s (matters requiring attention) or MRIA’s (matters requiring immediate attention) initially, till they mature on the CCAR best practices.
  • Reduced documentation – Fed will inform the CCAR participants who are subject to the qualitative submissions a month before on what are the in-scope supporting documentation, though the impact of this is minimal as firms still have to prepare exhaustive documentation ,but from an examination perspective it will help them to be better prepared and provide more focus on in scope topics
  • Opportunity to address capital deficiency –This is more important for the IHC’s as the Fed will give theman opportunity to supplement any capital deficiencies observed after running the stress tests. The IHC’scan get the necessary equity capital supplements from their parent to address this deficiency which will also helps them to avoid over capitalizing their US firms going forward

CCAR exercise continues to widen its net of participating banks and this year we will see the entry of 6 IHC’s who will be part of public disclosures for the first time since their private submissions to fed last year. This year’s CCAR submission will see more impact on IHC’s as they are very new to the rigor of CCAR exercise, but the good part is that they can leverage the Prior learnings of existing CCAR participants and work towards making their qualitative and quantitative CCAR submissions complete in all aspects.

Ajay Katara

Ajay Katara

Ajay Katara is a Domain Consultant with the Risk Management practice of the Banking and Financial Services (BFS) business unit at Tata Consultancy Services (TCS). He currently leads the BFS Risk Practice’s portfolio on Regulations and Robotics Process Automation. He has extensive experience of more than 13 years in Consulting

Solution design space cutting across CCAR Consulting, AML, Basel II implementation and credit risk, and has worked with several financial enterprises across geographies. He has significantly contributed to the conceptualization of strategic offerings in the risk management space and has been instrumental in successfully driving various consulting engagements. He has also authored many editorials, details of which can be found in his linked in profile (https://www.linkedin.com/in/ajaykatara/)