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Capital Plan Review 2013
Summary Instructions and Guidance
November 9, 2012
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Capital Plan Review 2013
Summary Instructions and Guidance
November 9, 2012
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
iii
Contents
Introduction ............................................................................................................................... 1
Instructions for Submission of Capital Plans ................................................................. 3
Submission Format and Timing ................................................................................................... 3
Coverage of the Submission ........................................................................................................ 3
Incomplete Data ......................................................................................................................... 4
Stress Testing Scenarios ............................................................................................................. 4
Correspondence Related to CapPR 2013 ..................................................................................... 6
Mandatory Elements of a Capital Plan ............................................................................ 7
Estimates of Projected Revenues, Losses, Reserves, and Pro Forma Capital Levels ....................... 7
Supporting Documentation for Analyses Used in Capital Plans .................................................... 11
Description of All Planned Capital Actions over the Planning Horizon ........................................... 12
Expected Changes to Business Plans Affecting Capital Adequacy or Funding .............................. 12
Supervisory Expectations for a BHC’s Capital Adequacy Process (CAP) ...................................... 13
Supervisory Assessments of Capital Plans
.................................................................... 15
Pro Forma Capital Ratios .......................................................................................................... 15
Common Dividend Payouts ....................................................................................................... 15
Basel III Transition Plans ............................................................................................................ 16
Federal Reserve Responses to Planned Capital Actions
........................................... 17
Resubmissions ......................................................................................................................... 17
Appendix 1: Supervisory Expectations for a Capital Adequacy
Process ....................................................................................................................................... 19
1
Introduction
As indicated in the Board’s rule regarding capital
plans (the capital plan rule), the Federal Reserve’s
assessment of capital adequacy for U.S.-domiciled,
top-tier bank holding companies (BHCs) with total
consolidated assets of $50 billion or more will
include consideration of a BHC’s overall financial
condition, risk profile, and capital adequacy on a
forward-looking basis.1 Assessments will also be
made on the overall content of a capital plan and the
strength of the BHC’s capital adequacy process,
including its capital policy.2 All BHCs subject to the
capital plan rule are required to submit a capital plan
approved by the BHC’s board of directors, or a com
mittee thereof, irrespective of whether the BHC
intends to undertake any capital distributions over
the planning horizon covered in its capital plan.
These instructions pertain to the BHCs that did not
participate in the 2009 Supervisory Capital Assess
ment Program (SCAP), but are required to submit
under the capital plan rule as part of the annual
Capital Plan Review (CapPR 2013).3 Instructions for
the Federal Reserve’s annual Comprehensive Capital
Analysis and Review (CCAR), which covers the larg
est BHCs, are being provided under separate cover to
the relevant institutions.4 For CapPR 2013, capital
1
2
3
4
The capital plan rule is codified at 12 CFR 225.8. Asset size is
measured over the previous four calendar quarters as reported
on the FR Y-9C regulatory report.
See section 225.8(e)(1)(i) of the capital plan rule. 12 CFR
225.8(e)(1)(i).
The bank holding companies participating in the CapPR 2013
are BBVA USA Bancshares Inc.; BMO Financial Corp.; Citi
zens Financial Group Inc.; Comerica Inc.; Discover Financial
Services; HSBC North America Holdings Inc.; Huntington
Bancshares Inc.; M&T Bank Corporation; Northern Trust Cor
poration; UnionBanCal Corporation; and Zions Bancorpora
tion. These 11 firms also participated in the CapPR 2012.
The 19 bank holding companies participating in the 2013
CCAR are Ally Financial Inc.; American Express Company;
Bank of America Corporation; The Bank of New York Mellon
Corporation; BB&T Corporation; Capital One Financial Cor
poration; Citigroup Inc.; Fifth Third Bancorp; The Goldman
Sachs Group, Inc.; JPMorgan Chase & Co.; Keycorp; MetLife,
Inc.; Morgan Stanley; The PNC Financial Services Group, Inc.;
Regions Financial Corporation; State Street Corporation; SunTrust Banks, Inc.; U.S. Bancorp; and Wells Fargo & Company.
plans should be submitted no later than January 7,
2013.5
As outlined in the capital plan rule, the supervisory
review of a BHC’s capital plan includes an assess
ment of
• the comprehensiveness of the capital plan, includ
ing the suitability of the BHC scenarios, and the
extent to which the risk-measurement and other
analysis underlying the plan capture and appropri
ately address potential risks stemming from all
activities across the BHC under baseline and
stressed operating conditions;
• the reasonableness of the BHC’s assumptions and
analysis underlying the capital plan and a review of
the robustness of the BHC’s capital adequacy
process;
• the BHC’s capital policy; and
• the BHC’s ability to maintain capital above each
minimum regulatory capital ratio and above a tier 1
common ratio of 5 percent on a pro forma basis
under expected and stressful conditions throughout
the planning horizon.6 See table 1 for a list of these
regulatory minimums.
As a part of the supervisory review of the compre
hensive capital plans, the Federal Reserve will also
assess BHCs’ strategies for addressing proposed revi
sions to the regulatory capital framework agreed
upon by the Basel Committee on Banking Supervi
sion (BCBS), commonly known as Basel III.7 The
Board and the other federal banking agencies have
5
6
7
These 19 firms also participated in the 2012 and 2011 CCARs
and the 2009 SCAP.
The capital plan rule requires capital plans to be submitted by
January 5; however, the Federal Reserve is granting an extension
of this deadline for purposes of CapPR 2013 because January 5,
2013, falls on a Saturday. See section 225.8(d)(1)(ii) of the capi
tal plan rule. 12 CFR 225.8(d)(1)(ii).
See section 225.8(e)(1)(i) of the capital plan rule. 12 CFR
225.8(e)(1)(i).
See Basel Committee on Banking Supervision (2010), “Basel
III: A Global Framework for More Resilient Banks and Bank
2
CapPR Summary Instructions 2013
Table 1. Regulatory Minimum Ratios
Regulatory Ratio
Tier 1 Common Ratio
Tier 1 Leverage Ratio
Tier 1 Risk-Based Capital Ratio
Total Risk-Based Capital Ratio
Regulatory
Minimum
5 percent
3 or 4 percent
4 percent
8 percent
* The tier 1 leverage ratio minimum is 3 percent for a BHC with a composite
supervisory rating of “1” or that is subject to the Board’s market-risk rule
(12 CFR part 225, appendix E); for all other BHCs, 4 percent.
begun the process for adopting the Basel III frame
work agreed to by the BCBS and issued three notices
of proposed rulemaking on Basel III in June 2012. In
line with these proposals, the Federal Reserve expects
that a BHC will demonstrate it can achieve, readily
and without difficulty, the ratios required by the
Basel III framework as it would come into effect in
the United States. In particular, the assessment
should reflect the proposed Basel III framework, as
described in the following proposed and final rules:
• Regulatory Capital Rules: Regulatory Capital,
Implementation of Basel III, Minimum Regulatory
Capital Ratios, Capital Adequacy, Transition Pro
visions, and Prompt Corrective Action (Basel III
NPR).8
• Regulatory Capital Rules: Advanced Approaches
Risk-Based Capital Rule; Market Risk Capital
Rule (Advanced Approaches NPR).9
• Risk-Based Capital Guidelines: Market Risk Rule
(Market Risk Final Rule).10
A BHC’s projections regarding Basel III also should
include any planned capital actions including divi
dends and other distributions.
BHCs participating in CapPR 2013 are required to
satisfy the stress test requirements of the capital plan
rule, but are not required to comply with the Board’s
rules implementing sections 165(i)(1) and (2) of the
Dodd-Frank Wall Street Reform and Consumer Pro
tection Act (DFA stress testing rules) until the stress
8
9
10
ing Systems,” (Basel: BCBS, December), www.bis.org/publ/
bcbs189.pdf.
77 Federal Register 52792 (August 30, 2012).
77 Federal Register 52978 (August 30, 2012).
77 Federal Register 53060 (August 30, 2012).
test cycle commencing on October 1, 2013.11 BHCs
participating in CapPR 2013 will use two of the same
supervisory scenarios as firms participating in
CCAR, and these instructions refer to the scenarios
by the same descriptions for consistency and clarity.12
Consistent with CapPR 2012, the Federal Reserve’s
overall assessment of capital plans will not be based
on supervisory estimates derived from independent
supervisory models of losses, revenues, and loan-loss
reserves, or independent supervisory models of pro
forma, post-stress capital ratios; BHC’s are not
required to submit stress test results using the capital
action assumptions required under the DFA stress
testing rules. The capital plan assessment will con
sider the extent to which a BHC’s capital plan cap
tures and addresses potential risks from the firm’s
activities as well as all planned and anticipated capi
tal actions. Also, the Federal Reserve will not publish
a summary of bank-specific results for CapPR 2013.
Each BHC must submit, as part of its capital plan
due January 7, results of its stress test using two sce
narios the Federal Reserve will provide under the
capital plan rule—baseline scenario (supervisory
baseline scenario) and severely adverse scenario
(supervisory severely adverse scenario). BHCs par
ticipating in CapPR 2013 are not required to submit
results using the adverse scenario (supervisory
adverse scenario). As part of its capital plan, each
BHC must submit estimated pro forma capital ratios
calculated with the BHC’s planned capital actions as
included in a BHC baseline scenario for the supervi
sory baseline and supervisory severely adverse sce
narios, which will inform the CapPR post-stress capi
tal analysis.
In addition to two supervisory scenarios, each BHC
must conduct a stress test based on its own scenarios,
including at least one stress scenario (BHC stress sce
nario) and a baseline scenario (BHC baseline sce
nario), and submit the results, reflecting the BHC’s
planned capital actions under these scenarios, over
the planning horizon. As discussed further below,
under certain conditions a BHC may choose to use
the supervisory baseline scenario as its own baseline
scenario. (See the “Stress Testing Scenarios” section
for further discussion of this topic.)
11
12
77 Federal Register 62377, 62377–62396 (October 12, 2012), to
be codified at 12 CFR 225.12.146(b).
See CFR 225.8(d)(2)(i)(A) of the capital plan rule.
3
Instructions for Submission of Capital Plans
This instructions document provides
• general logistics for BHCs’ capital plan
submissions;
• guidelines surrounding the mandatory elements of
a capital plan;
• information on what the Federal Reserve will assess
during CapPR 2013 and a description of how the
Federal Reserve will assess the planned capital
distributions;
• information on the Federal Reserve’s response to
capital plans and planned actions;
• information related to required resubmissions fol
lowing CapPR 2013; and
• information for BHCs requesting incremental capi
tal distributions following CapPR 2013.
In addition, appendix 1 provides supervisory expec
tations for effective capital adequacy processes
(CAP).
Submission Format and Timing
Each BHC’s capital plan, along with any proposals
for planned capital actions, should be approved by
the BHC’s board of directors, or committee thereof,
and submitted to the Federal Reserve no later than
January 5 of each calendar year in accordance with
the capital plan rule. As noted earlier, the Federal
Reserve may extend this date. For CapPR 2013, capi
tal plans and proposals for capital actions must be
received no later than January 7.
In connection with CapPR 2013, the Federal Reserve
will review the data and information provided in the
FR Y-14A, FR Y-14Q, and FR Y-14M regulatory
reports as of September 30 of the calendar year.
BHCs should reference the instructions associated
with each schedule and official communications to
determine the appropriate submission date for each
regulatory report.13 BHCs should report on the FR
Y-14A schedules their estimates of losses, resources
available to absorb those losses, balance sheet posi
tions, and capital composition on a quarterly basis
over the nine-quarter planning horizon, beginning
with the fourth quarter of the current calendar year.
BHCs are also required to submit qualitative infor
mation supporting their loss and pre-provision net
revenue (PPNR) estimates, including descriptions of
the methodologies used to produce the estimates, as
well as any other analyses that support their capital
plans.
Each BHC must submit its capital plan and any sup
porting information, including the FR Y-14A and
FR Y-14Q schedules, to the Federal Reserve through
a secure collaboration site. BHCs should submit FR
Y-14M schedules using processes outlined within the
instructions for each regulatory report and official
communications.14
Coverage of the Submission
CapPR 2013 is a comprehensive assessment that will
take into account all relevant risks to the BHC, such
as estimates of potential losses, including any that are
not explicitly covered by the information requested in
the FR Y-14A, FR Y-14Q, and FR Y-14M. It is the
responsibility of each BHC to capture all potential
sources of losses from all on{ and off{balance sheet
positions, as well as any other events that have the
potential to impact capital in both baseline and stress
environments. Notably, the Federal Reserve will place
particular focus on assessing the BHC stress scenario
analysis as part of the supervisory assessment of the
13
14
77 Federal Register 60695 (October 4, 2012); see also www
.federalreserve.gov/reportforms.
See id.
4
CapPR Summary Instructions 2013
completeness and suitability of each BHC’s capital
plan.15
ments are missing or errors are found during the data
validation process.17
A BHC’s submission of its pro forma, post{stress
capital projections in its capital plan, inclusive of
planned capital actions, must begin with data as of
September 30, and span the nine-quarter planning
horizon, beginning in the fourth quarter of the cur
rent calendar year and conclude at the end of the
fourth quarter, two years out. For CapPR 2013, the
planning horizon will commence at the beginning of
the 4Q12 (October 1, 2012) and conclude at the end
of the 4Q14 (December 31, 2014). The only excep
tion to this planning horizon is with respect to the
Basel III transition plan.
For the FR Y-14A schedules, BHCs should submit
final and complete data for CapPR 2013 by Janu
ary 7. BHCs may be asked to resubmit data—either
in whole or in part—after this due date should errors
or omissions be found; however, failure to submit
complete data to the Federal Reserve in a timely
manner may be a basis for objection to a capital plan.
• The Basel III and Dodd-Frank schedule required
under the FR Y-14A should be reported as of Sep
tember 30 of the current calendar year with projec
tions through December 31, five years out. For
CapPR 2013, data should be reported as of Sep
tember 30, 2012 through December 31, 2017 under
the supervisory and BHC baseline scenarios.
Incomplete Data
In general, all BHCs are required to report all data
elements asked for in the FR Y-14A, FR Y-14Q, and
FR Y-14M schedules; however, certain schedules,
worksheets, or data elements may be optional for a
BHC. The instructions for the FR Y-14A, FR
Y-14Q, and FR Y-14M schedules provide details on
how to determine whether a BHC must submit a spe
cific schedule, worksheet, or data element.
Under the capital plan rule, failure to submit com
plete data to the Federal Reserve in a timely manner
may be a basis for objection to a capital plan.16 A
BHC’s inability to provide required data by the due
dates will impact the Federal Reserve’s qualitative
assessment of the internal risk measurement and
management practices supporting a BHC’s capital
adequacy processes.
For the FR Y-14Q and FR Y-14M schedules, BHCs
may be asked to resubmit data—either in whole or in
part—after the initial due date as specified in the
associated report instructions if required data ele
Stress Testing Scenarios
For purposes of CapPR 2013, BHCs will be required
to submit the results of stress tests based on two
supervisory scenarios, at least one stressed scenario
developed by the BHC, and a BHC baseline scenario,
as follows:
• BHC baseline: a BHC{defined baseline scenario18
• BHC stress: at least one BHC{defined stress
scenario
• Supervisory baseline: a baseline scenario provided
by the Federal Reserve under the capital plan rule
• Supervisory severely adverse: a severely adverse sce
nario provided by the Federal Reserve under the
capital plan rule
The results of a BHC’s analysis for each scenario
should encompass all potential losses and other
impacts to net income that the BHC might experi
ence under the scenarios above. In all cases, BHCs
should substantiate that their results are consistent
with the specified macroeconomic and financial envi
ronment, and that the components of their results
are internally consistent within each scenario.
For purposes of CapPR 2013, the Federal Reserve
will be incorporating the BHC’s ability to sufficiently
capture their unique vulnerabilities within the BHC
scenarios into the overall supervisory assessment of
each BHC’s capital plan. The Federal Reserve will
focus particular attention on the processes surround
ing the development and implementation of the BHC
stress scenario to ensure that these processes are
robust; that the scenario is of comparable severity for
the BHC as the supervisory severely adverse scenario
17
18
15
16
See section 225.8(e)(1)(i)(A) of the capital plan rule. 12 CFR
225.8(e)(1)(i)(A).
See section 225.8(e)(2)(ii) of the capital plan rule. 12 CFR
225.8(e)(2)(ii)
See id.
A BHC may use the same baseline scenario as the supervisory
baseline scenario if the BHC believes the supervisory baseline
scenario appropriately represents its view of the most likely out
look for the risk factors salient to the BHC. Any BHC electing
to do so should provide appropriate supporting documentation.
November 9, 2012
• Planned Capital Actions: a BHC’s planned capital
actions under the BHC baseline scenario.
Table 2. Capital Worksheet Requirements
Scenario
BHC Baseline
Supervisory Baseline*
BHC Stress
Supervisory Severely Adverse
5
Capital Worksheet
Planned Capital
Actions
Planned Capital
Actions
Alternative Capital
Actions
Planned Capital
Actions
* If a BHC determines the supervisory baseline scenario to be appropriate for its
own BHC baseline, the BHC may submit identical FR Y-14A Summary
schedules.
is for the banking industry as a whole, and that it
captures and stresses key vulnerabilities and idiosyn
cratic risks facing the firm; and that the translation
of the scenario into loss, revenue, and post-stress
capital projections is conceptually sound and imple
mented in a well-controlled manner.
Supervisory Scenarios
The Federal Reserve will provide BHCs with a
description of the supervisory scenarios no later than
November 15 of the current calendar year. It is
important to note that the scenarios provided by the
Federal Reserve are not forecasts, but rather hypo
thetical scenarios to be used to assess the strength
and resilience of BHC capital in baseline and stressed
economic and financial market environments.
• Alternative Capital Actions: a BHC’s assumed capi
tal actions under the BHC stress scenario.
BHC Baseline and Stress Scenarios
A BHC’s scenario design process should involve
development of scenarios that affect the BHC as a
whole, stemming from macroeconomic and financial
market conditions, and should also include potential
BHC-specific events. Assumptions should remain
constant across business lines and risk areas for the
chosen scenario, since the objective is to see how the
BHC as a whole will be affected by a common and
internally consistent scenario. A BHC should con
sider the best manner in which to capture combina
tions of stressful events and circumstances, including
second-order and “knock-on” effects that may result
from the specified economic and financial environ
ment or any potential BHC-specific event.
The BHC baseline scenario should reflect the BHC’s
view of the expected path of the economy over the
planning horizon. A BHC may use the same baseline
scenario as the Federal Reserve baseline scenario if
the BHC believes the Federal Reserve baseline sce
nario appropriately represents their view of the most
likely outlook for the risk factors salient to the
BHC.19
The Federal Reserve will evaluate the BHC’s pro
forma post-stress capital ratios resulting from the
combination of stress performance measures (e.g.,
revenues, losses, and reserves from the supervisory
severely adverse scenario) and the BHC’s planned
capital actions (e.g., planned dividends, issuance, and
repurchases as provided in the BHC baseline sce
nario) against each minimum regulatory capital ratio
and a 5 percent tier 1 common ratio.
The BHC stress scenario should be based on a coher
ent, logical narrative of a severely adverse economic
and financial market environment and potential
BHC-specific events. The scenario narrative should
detail key events and circumstances that occur in the
scenario. As required in the FR Y-14A Scenario
schedule, BHCs must provide the quarterly trajecto
ries of key macroeconomic and financial variables for
its BHC baseline and BHC stress scenario.
For the BHC-defined scenarios, a BHC should
include pro forma projections using the BHC’s
planned capital actions as deemed appropriate by the
BHC for that scenario. For the supervisory baseline
and supervisory severely adverse scenarios, a BHC
should include pro forma capital projections using
the planned capital actions from the BHC baseline
scenario.
A BHC’s stress scenario should describe a severely
adverse hypothetical combination of circumstances
designed with the BHC’s particular vulnerabilities in
mind. Specifically, and as noted above, the BHC
stress scenario should be designed to stress factors
that affect all of its material exposures and activities,
capturing potential exposures from both on- and offbalance sheet positions. In addition, the forwardlooking analysis required in the BHC stress scenario
The following definitions and table 2 illustrate the
capital worksheet requirements for each scenario’s
FR Y-14A schedule.
19
See id.
6
CapPR Summary Instructions 2013
should be relevant to the direction and strategy set by
a BHC’s board of directors.20
Correspondence Related to CapPR
2013
All correspondence and questions regarding this
exercise and related issues should be communicated
to a secure mailbox, the address to which will be pro
20
Additional guidance related to scenario development as part of
stress testing can be found in SR letter 12-07, “Guidance on
Stress Testing for Banking Organizations with Total Consoli
dated Assets of More Than $10 Billion.”
vided directly to the CapPR BHCs. Questions will be
catalogued and, where appropriate, written responses
(removing any BHC identifying information) will be
provided to all BHCs via secure e-mail. Any BHCspecific questions submitted to the secure mailbox
will be addressed only with the relevant BHC via the
same secure mailbox or through direct communica
tion from the supervisory team. If needed, meetings
may be scheduled to discuss submitted questions in
more detail; however, only those responses that come
through the secure mailbox or through direct com
munication from the supervisory team will be consid
ered official.
7
Mandatory Elements of a Capital Plan
The capital plan rule defines a capital plan as “a writ
ten presentation of a company’s capital planning
strategies and capital adequacy process that includes
certain mandatory elements.” These mandatory ele
ments are organized into five main components:
1. an assessment of the expected uses and sources of
capital over the planning horizon
2. a description of all planned capital actions over
the planning horizon
3. a discussion of any expected changes to the
BHC’s business plan that are likely to have a
material impact on the BHC’s capital adequacy
or liquidity
4. a detailed description of the BHC’s process for
assessing capital adequacy
5. a BHC’s capital policy21
A BHC is required to conduct an assessment of the
expected uses and sources of capital over the plan
ning horizon assuming both expected and stressful
conditions. This assessment must contain the follow
ing elements:
• estimates of projected revenues, losses, reserves,
and pro forma capital levels, including any regula
tory capital ratios (for example, leverage, tier 1 riskbased, and total risk-based capital ratios) and any
additional capital measures deemed relevant by the
BHC, over the planning horizon under expected
conditions and under a range of stressed scenarios,
including any scenarios provided by the Federal
Reserve and at least one stress scenario developed
by the BHC appropriate to its business model and
portfolios
• a calculation of the pro forma tier 1 common ratio
over the planning horizon under expected condi
21
See section 225.8(d)(2) of the capital plan rule. 12 CFR
225.8(d)(2).
tions and under a range of stressed scenarios and
discussion of how the company will maintain all
minimum regulatory capital ratios and a pro forma
tier 1 common ratio above 5 percent under
expected conditions and the stressed scenarios
required
• a discussion of the results of the stress tests
required by law or regulation, and an explanation
of how the capital plan takes these results into
account
• a description of all planned capital actions over the
planning horizon
The remainder of this section provides additional
detail on these elements.
Estimates of Projected Revenues,
Losses, Reserves, and Pro Forma
Capital Levels
As noted above, for the purposes of CapPR 2013,
BHCs are to submit capital plans supported by their
internal capital adequacy assessment and capital
planning processes and include pro forma analyses in
each of the four scenarios. The Federal Reserve will
be assessing the processes and practices the BHCs
have in place to carry out this analysis, including the
risk identification, measurement, and management
practices supporting their analysis, as well as the gov
ernance and controls around these practices. (See
appendix 1 for a discussion of supervisory expecta
tions for capital adequacy processes that support a
BHC’s capital plan.)
Importantly, the format the Federal Reserve uses to
collect the FR Y-14 data does not imply that BHCs
should use any specific methodology to project their
losses and revenues for their stress tests or for any
8
CapPR Summary Instructions 2013
other internal analysis used to support their capital
plans; rather, a BHC’s submissions for each scenario
should be based on its own processes and analyses.
The Federal Reserve’s qualitative assessment of the
capital plans will focus on the robustness of a BHC’s
internal capital adequacy processes, with a particular
focus on the BHC stress scenario and the translation
of the BHC stress scenario into projected losses, rev
enues, and post-stress pro forma capital ratios.
In all cases, BHCs should demonstrate that their
results are consistent with the macroeconomic and
financial environments specified in the scenarios
being used, and that the various components of their
results are internally consistent. For example, it might
be inconsistent to project a shrinking balance sheet
while also projecting large increases in net income in
a stress or baseline environment. BHCs should sub
mit background information on the methodologies
supporting their estimates. This material should
include discussion of key approaches and assump
tions used to measure BHC-wide exposures and to
arrive at stress loss estimates, along with relevant
background on positions or business lines that could
have a material influence on outcomes.
A BHC should clearly identify and document in its
capital plan any aspects of its portfolios and expo
sures (e.g., a contractual loss mitigation arrangement;
exposures not well captured in the reporting frame
work; etc.) that are not adequately captured in the
FR Y-14Q or FR Y-14M and that it believes are
material to loss estimates for its portfolios, as well as
the BHC’s estimate of the potential impact of such
items on loss estimates under the baseline and stress
scenarios.
In general, BHCs should incorporate the following
into their pro forma estimates:
Definition of losses for loans: The losses to be esti
mated for loans held in accrual portfolios in this exer
cise are generally credit losses due to failure to pay
obligations (cash flow losses), rather than discounts
related to mark-to-market (MTM) values. In some
cases, BHCs may have loans that are being held for
sale or which are subject to purchase accounting
adjustments. In these cases, the analysis should
anticipate the change in value of the underlying asset,
apply the appropriate accounting treatment, and
determine the incremental losses.
Loan-loss estimates: BHCs should describe the
underlying models and methods used to project loan
losses, and provide background on the derivation of
estimated losses. Factors that could be cited to sup
port the reasonableness of estimated losses include
(but are not limited to) composition of the loan port
folios within a broad category (e.g., distribution
among Prime, Alt-A, and subprime loans within first
lien residential mortgages) and specific characteristics
of the portfolio within categories or subcategories
(e.g., vintage, credit score, loan-to-value ratio,
regional distribution, industry mix, ratings distribu
tion, or collateral type). Hypothetical behavioral
responses by BHC management should not be con
sidered as mitigating factors for the purposes of this
analysis. For example, hedges already in place should
be accounted for as potential mitigating factors, but
not assumptions about potential future hedging
activities.
Commitments and contingent and potential obliga
tions: The analysis should reflect expectations of cus
tomer draw-downs on unused credit commitments
under each scenario, as well as any assets and expo
sures that might be taken back on the balance sheet
or otherwise generate losses under stressful economic
conditions (e.g., assets held in asset-backed commer
cial paper conduits and other off-balance sheet fund
ing vehicles to which the BHC provides support).
Unconsolidated entities to which the BHC has poten
tial exposure are also within the scope of this exercise
and should be considered. If it is envisioned that
non-contractual support may be provided during a
stressful environment for certain obligations or expo
sures of sponsored or third-party entities, these
should be included in a BHC’s analysis of contingent
or potential obligations, and all associated impacts
should be captured.
Losses on available-for-sale (AFS) and held-to
maturity (HTM) securities: Each BHC should pro
vide projected other-than-temporary impairments
(OTTI) for AFS and HTM securities. OTTI projec
tions should be based on September 30, 2012, posi
tions and should be consistent with specified macro
economic assumptions and standard accounting
treatment. If the BHC bifurcates credit losses from
other losses, the method for deriving the bifurcation
should be provided in supporting documentation.
Allowance for loan losses: BHCs should estimate the
portion of the current allowance for loan losses avail
November 9, 2012
able to absorb credit losses on the loan portfolio for
each quarter under each scenario, while maintaining
an adequate allowance along the scenario path and at
the end of the scenario horizon. Loan-loss reserve
adequacy should be assessed against the likely size,
composition, and risk characteristics of the loan
portfolio throughout the planning horizon in a man
ner that is consistent with the BHC’s projections of
losses over that scenario.
Non{U.S. exposures: Loss, revenue, and loan-loss
reserve projections should cover positions and busi
nesses for the U.S. BHC on a consolidated basis. To
the extent that loss experience on foreign positions is
projected to differ from that on U.S. positions, BHCs
should provide supporting information to explain
those differences. For example, if the BHC is using
different loss rates for foreign positions, those foreign
positions should be explicitly identified and reported
separately, by position or loan type, in the BHC’s
supporting documentation.
Risk-weighted asset (RWA) projections: BHCs should
provide detailed support for all assumptions used to
derive projections of RWAs, including assumptions
related to components of balance sheet projections
(on- and off-balance sheet balances and mix), income
statement projections, underlying risk attributes of
exposures, and any known weakness in the transla
tion of assumptions into RWA estimates for each sce
nario. For example, BHCs should demonstrate how
credit RWAs over the projection horizon are related
to projected loan growth under the macroeconomic
scenario, increased credit provisions or charge-offs
for loan portfolios, and changing economic assump
tions; and how market RWAs are related to market
factors (e.g., equity index levels and bond spreads)
and projected trading revenue.
BHCs should demonstrate that these assumptions
are clearly conditioned on a given scenario and are
consistent with stated internal and external business
strategies. If BHC{specific assumptions (other than
broad macroeconomic assumptions) are used, BHCs
should also describe these assumptions and how they
relate to reported RWA projections. If the BHC’s
models for projecting RWAs rely upon historical rela
tionships, BHC should provide the historical data
and clearly describe why these relationships are
expected to be maintained in each scenario.
zon for any positions subject to the market-risk rule.
For the first quarter of the planning horizon, BHCs
must use the market-risk capital rules in effect on
December 31, 2012, for purposes of identifying posi
tions subject to the market-risk rule and projecting
the RWA amount of these positions.22 For the second
through ninth quarters of the planning horizon,
BHCs must use the market-risk capital rules that will
be in effect on January 1, 2013, for purposes of iden
tifying positions subject to the market-risk rule and
projecting the RWA amount of these positions in
each quarter.23
Any BHC that has not received approval from the
Federal Reserve for one or more models as of Janu
ary 6, 2013, must follow the procedures in the appli
cable market-risk rules to determine the RWA of any
position or portfolio that is not covered by an
approved model. For example, for purposes of any
RWA calculations in the first quarter of the planning
horizon, a BHC must use standard specific risk
charges for any position(s) for which the BHC has
not received specific risk model approval as of
December 31, 2012. Similarly, for purposes of any
RWA calculations in the second through ninth quar
ters of the planning horizon, a BHC must use stan
dard specific risk charges for any position(s) or port
folio(s) for which the BHC has not received specific
risk model approval, incremental risk model
approval, or comprehensive risk model approval as of
January 6, 2013. In addition, if a BHC does not have
an approved Stressed Value at Risk (SVaR) model as
of January 6, 2013, the Federal Reserve will specify a
substitute capital requirement for this charge. By
December 3, 2012, the Federal Reserve will notify in
writing each BHC without an approved SVaR model
of the applicable requirement.24
Balance sheet projections: Balance projections are a
critical input to loss and revenue estimates. BHCs are
expected to demonstrate that the approach used to
generate those projections is consistent internally,
with related processes, and externally, with implica
tions of the macroeconomic scenario. Ultimately,
balances are driven by the dynamic interaction of
various flows through the planning horizon. The
models and business processes used to make balance
projections should be sufficiently documented so as
to allow for supervisory assessment.
22
Treatment of trading and counterparty RWA: BHCs
subject to the market-risk rule must use the following
procedures to project RWAs over the planning hori
9
23
24
12 CFR part 225, appendix E.
See Market Risk Final Rule.
See 77 Federal Register 53060, 53100 (August 30, 2012), to be
codified at 12 CFR part 225, appendix E, section 1(c).
10
CapPR Summary Instructions 2013
Balance projections should reconcile to projections
for originations, pay-downs, draw-downs, and losses
under each scenario. In stressed macroeconomic sce
narios, care should be taken to justify major changes
in portfolio composition based, for example, on
assumptions about a BHC’s strategic direction,
including events such as material sales or purchases.
The losses used in producing balances should be the
same as those produced in internal loss estimate
modeling for the stress test. Prepayment behavior
should link to the relevant economic scenario and the
maturity profile of the asset portfolio. Any assumed
reallocation of assets into securities or cash should
recognize the limits of portfolio transformation
under stress due to market pressures and current
portfolio characteristics, including the likely state of
interbank lending markets and deposit levels.
External consistency is also an important consider
ation for balance projections. To the extent that
changes in the balance sheet are driven by a BHC’s
strategic direction, care should be taken to document
and explain in detail that underlying assumptions are
reasonable in a stressed economic environment. Spe
cifically, BHCs should evaluate the consequences of
other market participants possibly taking actions
similar to their own in a stressed environment—e.g.,
the possible positive outcomes that might be
obtained if a BHC were to be the only market par
ticipant taking such actions in a particular market
environment are likely to be mitigated if others are
also attempting to take similar actions.
Fair-value loans: BHCs may have loans that are held
for sale or held for investment, for which they have
adopted fair-value accounting (collectively, fair-value
loans). BHCs should report any estimated changes in
the value of fair-value loans, after taking into
account any forward sales already in place, in other
non-interest income under the conditions specified in
the macroeconomic scenario (i.e., supervisory base
line, supervisory severely adverse, BHC baseline, and
BHC stress).
Pre-provision net revenue (PPNR): PPNR estimates
should be consistent with the economic environment
specified in the relevant scenario. BHCs should
ensure that PPNR projections are explicitly based on,
and directly tie to, balance sheet and other exposure
assumptions used for related loss estimates. In addi
tion, BHCs should apply assumptions consistent
with the scenario and resulting business strategy
when projecting PPNR for fee-based lines of business
(e.g., asset management), while ensuring that
expenses are appropriately taking into account both
the direct impacts of the economic environment (e.g.,
foreclosure costs) and projected revenues.
Residential mortgage representations and warranties:
As part of PPNR, BHCs will be expected to estimate
losses associated with requests by mortgage investors,
including both government-sponsored enterprises
and private-label securities holders, to repurchase
loans deemed to have breached representations and
warranties, or with investor litigation that broadly
seeks compensation from BHCs for losses. BHCs
should consider not only how the macro scenarios
could affect losses from repurchased loans, but also a
range of legal process outcomes, including worse
than-expected resolutions of the various contract
claims or threatened or pending litigation against the
BHC and against various industry participants.
BHCs should provide appropriate support of the
adverse outcomes considered in their analysis.
Mortgage-servicing rights (MSR): All revenue and
expenses related to MSRs and the associated noninterest income and non-interest expense line items
should be reported on the PPNR schedules.
Operational-risk losses: Projections of losses arising
from inadequate or failed internal processes, people
and systems, or from external events should be
reported by the BHC as operational-risk losses, a
component of PPNR. As highlighted in the FR
Y-14A Summary schedule instructions, examples of
operational-risk loss events include those losses
related to improper business practices (including
class action lawsuits), execution errors, and fraud.
BHCs should specifically consider the possibility of
support for BHC-sponsored entities, as well as poten
tial for charges related to legal reserves and
provisions.
Trading revenues in PPNR: All BHCs are expected to
project PPNR, including trading-related revenues,
conditional on the specifications of the assumed
macroeconomic scenario (i.e., supervisory baseline,
supervisory severely adverse, BHC baseline, and
BHC stress). In this regard, all BHCs with trading
activities and private equity investments should esti
mate any potential profit and loss impact that these
positions might experience under the macroeconomic
scenario. Estimated impacts should include those
stemming from potential defaults on credit sensitive
positions held in the trading account and from coun
terparty credit exposures, and valuation declines (and
recoveries specific to those declines) on loans, securi
November 9, 2012
11
ties and other trading or MTM positions, and private
equity investments (regardless of the portfolio in
which a private equity position is booked). Private
equity-related loss estimates should be broken out
from other trading or MTM loss and should include
consideration of drawdowns against commitments.
tion both on a notional basis and on the basis of the
dollar amount included in regulatory capital.
The analysis of potential losses from counterparty
credit exposures should include estimates of changes
in the size of counterparty exposures and of the
impact of deterioration of counterparties’ creditwor
thiness in the scenario, including credit valuation
adjustments and any additional potential losses from
defaults.
Documentation of risk-measurement practices: Capi
tal plan submissions should include documentation
of key risk identification and measurement practices
supporting the BHC-wide stress testing required in
the capital plans. As previously noted, an assessment
of the robustness of these practices is a critical aspect
of the supervisory assessment of capital adequacy
processes, and their application under the BHC stress
scenario will be a particular area of supervisory
focus.
BHCs should demonstrate that their historical data
selection and general approach is credible and appli
cable for the assumed macroeconomic scenario.
BHCs should not assume that trading-related PPNR
could never fall below historical levels.
Basel III: BHCs are to include estimates, under the
supervisory baseline scenario, of the composition
and levels of regulatory capital, risk-weighted assets,
and leverage ratio exposures used to calculate mini
mum regulatory capital ratios (including the capital
conservation buffer) under the Basel III framework,
as set forth by the Final Market Risk Rule and the
proposed requirements of the Basel III NPR and the
Advanced Approaches NPR for applicable BHCs.
Each BHC’s submission should include supporting
documentation on all material planned actions that
the BHC intends to pursue in order to meet the pro
posed Basel III target ratios, including, but not lim
ited to, the run-off or sale of existing portfolio(s), the
issuance of regulatory capital instruments and other
strategic corporate actions.
Regulatory capital: BHCs are to provide data on the
balances of regulatory capital instruments under cur
rent U.S. capital adequacy guidelines, aggregated by
instrument type based on actual balances as of Sep
tember 30 of the current calendar year and projected
balances as of each quarter end through the remain
ing planning horizon.25 BHCs are to report informa
25
See 12 CFR part 225, appendices A, D, E, and G; see also sec
tion 225.8(c) of the capital plan rule.
Supporting Documentation for
Analyses Used in Capital Plans
Documentation of internal stress testing methodolo
gies: BHCs should include in their capital plan sub
missions thorough documentation that describes key
methodologies and assumptions for performing stress
testing on their portfolios. Documentation should
clearly describe the model development process, the
derivation of outcomes, and validation procedures, as
well as assumptions concerning new growth and
changes to credit policy. Supporting documentation
should clearly describe internal controls and gover
nance processes around the development of capital
plans. Senior management should provide boards of
directors with sufficient information to facilitate the
board’s full understanding of the stress testing used
by the BHC for capital planning purposes.
Assumptions and approaches: BHCs should provide
credible support for BHC-specific assumptions,
including any known weaknesses in the translation of
assumptions into loss and resource estimates. An
overreliance on past patterns of credit migration (the
basis for roll rate and ratings transition models) may
be a weakness when considering stress scenarios.
BHCs should demonstrate that their approaches are
clearly conditioned on the scenario under study.
While judgment is an essential part of risk measure
ment and risk management, including for loss esti
mation purposes, BHCs should not be overly reliant
on judgment to prepare their loss estimates without
providing documentation or evidence of transpar
ency and discipline around the process. Any manage
12
CapPR Summary Instructions 2013
ment judgment applied should be adequately sup
ported and in line with scenario conditions, should
be consistently conservative in the assumptions made
to arrive at loss rates, and there should be appropri
ate challenge of assumptions by senior management
and the board of directors.
Documentation related to the BHC scenario assump
tions: BHCs should include appropriate documenta
tion related to their individual approach to the BHC
baseline and BHC stress scenario in their capital plan
submission. As detailed in the FR Y-14A Scenario
schedule instructions, BHCs are required to provide
detailed supporting documentation and a listing of
all key variables assumed for each scenario. The Sce
nario schedule should be complete, and the variables
listed should be comprehensive and appropriate for
each BHC. In addition, BHCs should provide
detailed documentation describing all methodologies
and key assumptions impacting the BHCs’ loss and
PPNR estimates. Supervisors will focus particular
attention on a BHC’s ability to adequately support
the approach and methodologies used for its BHC
scenarios.
Validation and independent review: In addition to
being properly documented, models employed by
BHCs should be independently validated or other
wise reviewed in line with model-risk management
expectations presented in existing supervisory guid
ance. While use of existing risk-measurement models
and processes provides a useful reference point for
considering stress scenario potential loss estimates,
BHCs should consider whether these processes gener
ate outputs that are relevant in a stressful scenario.
Use of such models may need to be supplemented
with other data elements and alternative methodolo
gies. It is critical that BHCs assess the vulnerability of
their models to error, understand any other limita
tions, and consider the risk to the BHC should esti
mates based on those models prove materially inaccu
rate.26
Description of All Planned Capital
Actions over the Planning Horizon
A BHC’s capital plan must describe all planned capi
tal actions over the planning horizon. As described in
the capital plan rule, a capital action is any issuance
26
See SR 11-7, “Guidance on Model Risk Management,” www
.federalreserve.gov/bankinforeg/srletters/sr1107.htm, for addi
tional information regarding model validation.
of a debt or equity capital instrument, capital distri
bution, and any similar action that the Federal
Reserve determines could impact a BHC’s consoli
dated capital. A capital distribution is a redemption
or repurchase of any debt or equity capital instru
ment, a payment of common or preferred stock divi
dends, a payment that may be temporarily or perma
nently suspended by the issuer on any instrument
that is eligible for inclusion in the numerator of any
minimum regulatory capital ratio, and any similar
transaction that the Federal Reserve determines to be
in substance a distribution of capital.
As part of the CapPR capital plan submission, BHCs
should calculate pro forma capital ratios using their
planned capital actions over the planning horizon
under the BHC baseline scenario and the alternative
capital actions projected to be taken under the BHC
stress scenario. With respect to the planned capital
actions under the BHC baseline scenario,
1. for the first quarter of the planning horizon, the
BHC must take into account the actual capital
actions taken during that quarter; and
2. for each of the second through ninth quarters of
the planning horizon, the BHC must include any
capital actions proposed in its capital plan.
In the second quarter of the planning horizon, a
BHC should include capital actions in an amount
that is no greater than the amount in the BHC’s most
recently approved capital plan. For net repurchases in
the second quarter of the planning horizon, the BHC
should submit an amount not greater than the
unused portion of cumulative net repurchases under
the BHC’s most recently approved capital plan,
where cumulative for CapPR 2013 is defined as the
period beginning in 2Q12 and ending in 1Q13.
With respect to a BHC’s projections under the super
visory baseline and supervisory severely adverse sce
narios, the BHC must calculate the pro forma capital
ratios on the capital worksheets within the FR Y-14A
Summary schedule using the BHC’s planned capital
actions in the BHC baseline scenario.
Expected Changes to Business Plans
Affecting Capital Adequacy
or Funding
Each BHC should include in its capital plan a discus
sion of any expected changes to the BHC’s business
November 9, 2012
plan that are likely to have a material impact on the
BHC’s capital adequacy and funding profile.
Examples of changes to a business plan that may
have a material impact could include a proposed
merger or divestiture, changes in key business strate
gies, or significant investments. In this discussion, the
company should consider not just the impacts of
these expected changes, but also the potential adverse
consequences should the actions described above not
result in the planned changes—e.g., a merger plan
falls through, a change in business strategy is not
achieved, or there is a loss on the planned significant
investment.
tal adequacy (CAP).27 A BHC’s CAP should reflect a
full understanding of its risks and ensure that it
holds capital corresponding to those risks to main
tain capital adequacy. The detailed description of a
company’s CAP should include a discussion of how,
under stressful conditions, the BHC will maintain
capital commensurate with its risks—above the mini
mum regulatory capital ratios—and serve as a source
of strength to its depository institution subsidiaries.
Supervisory Expectations for a BHC’s
Capital Adequacy Process (CAP)
An important component of a BHC’s capital plan is
a description of the BHC’s process for assessing capi
13
27
See the appendix for a detailed description of supervisory
expectations for CAP.
15
Supervisory Assessments of Capital Plans
BHCs will be evaluated against the factors described
in the capital plan rule which include a BHC’s ability
to maintain capital above each minimum regulatory
capital ratio (leverage, tier 1 risk-based, and total
risk-based) and above a tier 1 common ratio of
5 percent on a pro forma basis under baseline and
stress conditions throughout the planning horizon.
The overall assessment of capital plans for BHCs
that participate in CapPR 2013 will not be based on
supervisory estimates derived from independent
supervisory models of losses, revenues, and loan-loss
reserves, or independent supervisory models of pro
forma, post-stress capital ratios. To support its
assessment, the Federal Reserve will review the analy
ses in a BHC’s capital plan, including its stress test
results. In addition, the Federal Reserve could object
to a BHC’s capital plan for other reasons, including
• there are outstanding material unresolved supervi
sory issues;
• assumptions and analyses underlying the BHC’s
capital plan are inadequate;
• the BHC’s capital adequacy process, including the
risk measurement and management practices sup
porting this process, are not sufficiently robust; or
• the CapPR 2013 assessment results in a determina
tion that a BHC’s CAP or proposed capital distri
butions would otherwise constitute an unsafe or
unsound practice, or would violate any law, regula
tion, Board order, directive, or any condition
imposed by, or written agreement with, the
Board.28
Pro Forma Capital Ratios
As part of CapPR 2013, the Federal Reserve requires
BHCs to use their planned capital actions from the
BHC baseline scenario in the supervisory severely
adverse scenario. In other words, the Federal Reserve
28
See section 225.8(e)(2)(ii) of the capital plan rule. 12 CFR
225.8(e)(2)(ii).
will in part be assessing if a BHC would be capable
of continuing to meet supervisory expectations for
minimum capital ratios (the leverage, tier 1 riskbased, and total risk-based capital ratios) and a tier 1
common capital ratio of at least 5 percent through
out the planning time horizon even if severely
adverse stress conditions emerged and the BHC did
not reduce planned capital distributions.
A quantitative assessment of the appropriateness of
planned capital actions will also be evaluated based
on its common dividend payout ratio (common divi
dends relative to net income available to common
shareholders) in the supervisory baseline scenarios,
and its projected path to compliance with Basel III
under the baseline scenario as Basel III is phased in
in the United States.
Changes to proposed capital distributions after the
initial submission may require submission of a
revised plan in a subsequent quarter.29 The Federal
Reserve will use the dollar amount of distributions
contained in a BHC’s FR Y-14A when assessing
capital plans. The Federal Reserve’s decision to
object, or issue a notice of non-objection, to a capital
plan will be specific to each BHC’s planned capital
actions.
Common Dividend Payouts
The Federal Reserve expects that capital plans will
reflect conservative common dividend payout ratios.
In particular, requests that imply common dividend
payout ratios above 30 percent of projected after-tax
net income available to common shareholders in
either the BHC baseline or supervisory baseline will
receive particularly close scrutiny.
29
See sections 225.8(d)(4) and (f) of the capital plan rule. 12 CFR
225.8(d)(4) and (f).
16
CapPR Summary Instructions 2013
Basel III Transition Plans
As part of CapPR 2013, the Federal Reserve will
continue to evaluate whether the proposed capital
actions are appropriate in light of the BHC’s plans to
meet the proposed Basel III requirements. As part of
its capital plan submission, a BHC should provide a
transition plan that includes pro forma estimates
under baseline conditions of the BHC’s regulatory
capital ratios under the proposed Basel III capital
framework as it would be implemented in the United
States.30 As stated in the September 2010 Group of
Governors and Heads of Supervision agreements,
BHCs that meet the minimum ratio requirement dur
ing the Basel III transition period but remain below
the 7 percent tier 1 common equity target (minimum
plus conservation buffer) will be expected to main
tain prudent earnings retention policies with a view
to meeting the conservation buffer under the timeframe described in the Basel III NPR.31
A BHC should, through its capital plan, demonstrate
an ability to maintain no less than steady progress
30
31
See supra notes 8–10.
See 77 Federal Register 52792, 52864 (August 30, 2012), pro
posed section __.300(b) of the Basel III NPR.
along a path between its existing Basel III estimated
capital ratios and the fully phased in Basel III
requirement in 2019. The Federal Reserve will closely
scrutinize plans that fall short of this supervisory
expectation.
Some BHCs may exceed the transition targets over
the near term, but not yet meet the fully-phased-in
targets. Those BHCs are expected to submit plans
reflecting steady accretion of capital at a sufficient
pace to demonstrate continual progress toward full
compliance with the proposed Basel III framework as
proposed to be implemented in the United States,
avoiding the need to attempt to achieve back-loaded
increases in capital ratios in an uncertain future
environment.
The Federal Reserve expects that any BHC perfor
mance projections that suggest that ratios would fall
below the transitional Basel III targets at any point
over the Basel III projection period would be accom
panied by proposed actions that reflect affirmative
steps to improve the BHC’s capital ratios, including
actions such as external capital raises, to provide
great assurance that the BHC would continue to meet
the Basel III transition targets.
17
Federal Reserve Responses
to Planned Capital Actions
After performing appropriate analysis, the Federal
Reserve will, by March 31, either object or provide a
notice of non-objection to the submitted capital plan
based on assessments of the comprehensiveness and
quality of the plan, pro forma, post-stress capital
ratios under the scenarios, and Basel III transition
plan. The Federal Reserve could object in whole or in
part to the proposed capital actions in the plans. The
supervisory assessment will be conducted across the
entire nine-quarter planning horizon; however, the
object or non-object decision applies specifically to
capital actions during the four quarters beginning
with the second quarter of the following calendar
year. For CapPR 2013, this will apply to the 2Q13
through 1Q14 capital actions.
Submissions that are late, incomplete, or otherwise
unclear could result in an objection to the plan and a
mandatory resubmission of a new plan, which may
not be reviewed until the following quarter. Upon the
Federal Reserve’s objection to a capital plan, the
BHC may not make any capital distribution other
than those capital distributions with respect to which
the Federal Reserve has indicated in writing its non
objection.32
Based on a review of a BHC’s capital plan, support
ing information, and data submissions, the Federal
Reserve may require additional supporting informa
tion or analysis from a BHC, or require it to revise
and resubmit its plan. Any of these may also result in
the delay of evaluation of capital actions until a sub
sequent calendar quarter.
It is important to note that the capital adequacy pro
cess described in the capital plan rule is equivalent to
an internal capital adequacy assessment process
(ICAAP) under the Federal Reserve’s advanced
approaches capital guidelines.33 Accordingly, the
seven principles articulated in the appendix to these
32
33
See section 225.8(e)(2)(iv) of the capital plan rule. 12 CFR
225.8(e)(2)(iv).
73 Federal Register 44620 (July 31, 2008).
instructions are consistent with the U.S. federal bank
ing agencies’ supervisory guidance relating to the
ICAAP under the advanced approaches guidelines. If
the Federal Reserve identifies substantial weaknesses
in a BHC’s capital adequacy process, that finding on
its own could justify an objection to a BHC’s capital
plan. However, a non-objection to a BHC’s capital
plan does not necessarily mean that a BHC is consid
ered to have a fully satisfactory capital adequacy
process.
Resubmissions
If a BHC receives an objection to its capital plan it
must resubmit within 30 days unless that period is
extended by the Federal Reserve. The Federal
Reserve at all times retains the ability to ultimately
object to capital distributions in future quarters if a
BHC exhibits a material decline in performance or a
deteriorating outlook materially increases BHCspecific risks.
As detailed in the capital plan rule, a BHC must
update and resubmit its capital plan if it determines
there has been or will be a material change in the
BHC’s risk profile (including a material change in its
business strategy or any material risk exposures),
financial condition, or corporate structure since the
BHC adopted the capital plan. Further, the Federal
Reserve may direct a BHC to revise and resubmit its
capital plan for a number of reasons, including if a
stress scenario developed by a BHC is not appropri
ate to its business model and portfolios, or changes in
financial markets or the macroeconomic outlook that
could have a material impact on a BHC’s risk profile
and financial condition requires the use of updated
scenarios.
The capital plan rule provides that a BHC must
request prior approval of a capital distribution if the
“dollar amount of the capital distribution will exceed
the amount described in the capital plan for which a
non-objection was issued” unless an exception (i.e.,
18
CapPR Summary Instructions 2013
less than 1 percent of tier 1 capital) is met.34 In par
ticular, a BHC should notify the Federal Reserve as
early as possible before issuing any capital instrument
that counts as regulatory capital and that was not
included in its capital plan. Any capital distribution
associated with the issuance that was not identified in
the capital plan is subject to the requirements of sec
34
See section 225.8(f) of the capital plan rule. 12 CFR 225.8(f).
tion 225.8(f) of the capital plan rule (12 CFR
225.8(f)). The Federal Reserve will examine perfor
mance relative to the initial projections and the ratio
nale for the request. Any such request for prior
approval should incorporate a fully updated capital
plan, including relevant FR Y-14 schedules reflecting
updated baseline and supervisory stress scenarios
provided by the Federal Reserve, unless otherwise
directed by the Federal Reserve.
19
Appendix 1: Supervisory Expectations
for a Capital Adequacy Process
A BHC’s capital adequacy process (CAP) should
adhere to the following principles:
Principle 1: The BHC has a sound risk measurement
and management infrastructure that supports the
identification, measurement, assessment, and control
of all material risks arising from its exposures and
business activities.
• A satisfactory CAP requires (1) a comprehensive
risk identification process, and (2) complete and
accurate measurement and assessment of all mate
rial risks.
• A BHC should measure or assess the full spectrum
of risks that face the BHC, using both quantitative
and qualitative methods, where applicable.
• The BHC should have data capture and retention
systems that allow for the input, use, and storage of
information required for sound risk identification
and measurement and to produce reliable inputs
for assessments of capital adequacy.
• Quantitative processes for measuring risks should
meet supervisory expectations for model effective
ness and be supported by robust model develop
ment, documentation, validation, and overall
model governance practices. Both qualitative and
quantitative processes for assessing risk should be
transparent, repeatable, and reviewable by an inde
pendent party.
• Any identified weaknesses in risk measures used as
inputs to the capital adequacy process should be
documented and reported to relevant parties, with
an assessment of the potential impact of riskmeasurement weaknesses on the reliability of
the CAP.
Principle 2: The BHC has effective processes for
translating risk measures into estimates of potential
losses over a range of stressful scenarios and environ
ments and for aggregating those estimated losses
across the BHC.
• A CAP should include methodologies that generate
estimates of potential losses for all material risk
exposures, one of which should be an enterprisewide stress test using scenario analysis. Methodolo
gies should be complementary, not suffer from
common limitations, and minimize reliance on
common assumptions.
• Using the loss estimation methodologies for its
various risk exposures, a BHC should develop con
sistent and repeatable processes to aggregate its loss
estimates on an enterprise{wide basis.
• A BHC should demonstrate that its loss estimation
tools are developed using sound modeling
approaches, appropriate for the manner in which
they are being employed, and that the most rel
evant limitations are clearly identified, well docu
mented, and appropriately communicated.
• A BHC should recognize that its loss projections
are estimates and should have a good understand
ing of the uncertainty around those estimates,
including the potential margin of error and the sen
sitivity of the estimates to changes in inputs and
key assumptions.
Principle 3: The BHC has a clear definition of avail
able capital resources and an effective process for esti
mating available capital resources (including any pro
jected revenues) over the same range of stressful sce
narios and environments used for estimating losses.
• Management and the board of directors should
understand the loss-absorption capabilities of the
components of the BHC’s capital base, and main
tain projection methodologies for each of the capi
tal components included in relevant capital
adequacy metrics.
• In estimating available capital resources, a BHC
will need to consider not only its current positions
and mix of capital instruments, but also how its
capital resources may evolve over time under vary
ing circumstances and stress scenarios.
20
CapPR Summary Instructions 2013
• As part of a comprehensive enterprise-wide stress
testing program, projections of pre-provision net
revenue (PPNR) should be consistent with balance
sheet and other exposure assumptions used for
related loss estimation. Projections should estimate
all key elements of PPNR, including net interest
income, non-interest income, and non-interest
expense at a level of granularity consistent with
material revenue and expense components.
• A BHC should demonstrate that its capital
resource estimation tools are developed using
sound modeling approaches, appropriate for the
manner in which they are being employed, and that
the most relevant limitations are clearly identified,
well documented, and appropriately
communicated.
• A BHC should recognize that its projections of
capital resources are estimates and should have a
good understanding of the uncertainty around
those estimates, including the potential margin of
error and the sensitivity of the estimates to changes
in inputs and key assumptions.
Principle 4: The BHC has processes for bringing
together estimates of losses and capital resources to
assess the combined impact on capital adequacy in
relation to the BHC’s stated goals for the level and
composition of capital.
• A BHC should have a comprehensive and consis
tently executed process for combining loss,
resource, and balance sheet estimates to assess the
baseline and post-stress impact of those estimates
on capital measures.
• A BHC should calculate and use several capital
measures that represent both leverage and risk at
specified time horizons under both baseline and
stressful conditions, consistent with its capital
policy framework. Measures should include quar
terly estimates for the impact on tier 1 common,
total tier 1, total capital, and tier 1 leverage ratios,
as well as other capital and risk measures useful in
assessing overall capital adequacy.
• The processes for bringing together estimates of
losses and capital resources should ensure that
appropriately stressful conditions over the BHC’s
planning horizon have been incorporated to prop
erly address the institution’s unique vulnerabilities.
• The processes should provide for the presentation
of any information that may have material bearing
on the BHC’s capital adequacy assessment, includ
ing all relevant risks and strategic factors, as well as
key uncertainties and process limitations.
Principle 5: The BHC has a comprehensive capital
policy and robust capital planning practices for estab
lishing capital goals, determining appropriate capital
levels and composition of capital, making decisions
about capital actions, and maintaining capital contin
gency plans.
Capital Policy
• A capital policy is defined as a BHC’s written
assessment of the principles and guidelines used for
capital planning, capital issuance, and usage and
distributions, including internal capital goals; the
quantitative or qualitative guidelines for dividend
and stock repurchases; the strategies for addressing
potential capital shortfalls; and the internal gover
nance procedures around capital policy principles
and guidelines.
• A BHC should establish capital goals aligned with
its risk appetite and risk profile as well as expecta
tions of stakeholders, providing specific targets for
the level and composition of capital. The BHC
should ensure that maintaining its internal capital
goals will allow it to continue its operations under
stressful conditions.
• The capital policy should describe the decision
making processes regarding capital goals, the level
and composition of capital, capital actions, and
capital contingency plans, including an explanation
of the roles and responsibilities of key decision
makers and information and analysis used to make
decisions.
• In its capital policy the BHC should describe its
methods for considering stressful conditions that
appropriately reflect the BHC’s unique vulnerabili
ties, including the choice of stress scenarios. The
policy should discuss how the BHC will address the
potential impact of changes or uncertainties in the
economic, financial, regulatory, or accounting
environment.
• The BHC should outline in its policy specific capi
tal contingency actions it would consider to remedy
any current or prospective deficiencies in its capital
position, including any triggers and escalation pro
cedures. The policy should also include a detailed
explanation of the circumstances in which it will
reduce or suspend a dividend or repurchase pro
gram, or will not execute a previously planned
capital action.
November 9, 2012
• A BHC should establish a minimum frequency
with which its capital plan is reevaluated (at least
annually). In addition, a BHC should review its
capital policy at least annually to ensure it remains
relevant and current.
Capital Planning Practices
• At regular intervals, a BHC should compare the
estimates of baseline and post-stress capital meas
ures (see Principle 4) to the capital goals established
in the capital policy for purposes of informing
capital decisions.
• For capital decisions, consideration should be given
to any information that may have material bearing
on the BHC’s capital adequacy assessment, includ
ing all relevant risks and strategic factors, key
uncertainties, and limitations of the CAP.
• Assessments of capital adequacy and decisions
about capital should be supported by high-quality
data and information, informed by current and rel
evant analysis, and subject to challenge by senior
management and the board of directors.
21
that all aspects of the CAP are functioning as
intended.
• Policies and procedures should ensure a consistent
and repeatable process and provide transparency to
third parties for their understanding of a BHC’s
CAP processes and practices. Policies and proce
dures should be comprehensive, relevant to their
use in the CAP, periodically updated and approved,
and cover the entire CAP and all of its
components.
• Specific to the CAP, a BHC should have internal
controls that ensure the integrity of reported
results and that all material changes to the CAP
and its components are appropriately documented,
reviewed, and approved. A BHC should have con
trols to ensure that management information sys
tems are robust enough to support stress tests with
sufficient flexibility to run ad hoc analysis as
needed.
• Periodically, the BHC should conduct a thorough
assessment of its capital contingency strategies,
including their feasibility under stress, impact, tim
ing, and potential stakeholder reactions.
• Expectations for validation and independent review
for components of the CAP are consistent with
existing supervisory guidance on model risk man
agement (SR letter 11-7). Models should be inde
pendently validated or otherwise reviewed in line
with model risk management and model gover
nance expectations.
• The BHC should regularly review and update its
consideration of stressful conditions, including sce
nario assumptions and variables, to reflect current
market/economic conditions, changing portfolio
risk characteristics, regulatory/accounting changes,
and other relevant developments.
• A BHC should have clear and comprehensive
documentation for all aspects of its CAP, including
its risk measurement and management infrastruc
ture, loss and resource estimation methodologies,
the process for making capital decisions, and effi
cacy of control and governance functions.
• A BHC should administer its capital planning
activities and capital decision processes in confor
mance with its policy framework, documenting and
justifying any divergence from policy.
• A BHC’s internal audit should play a strong role in
evaluating the CAP and its components. A full
review of the CAP should be done by audit peri
odically to ensure that as a whole the CAP is func
tioning as expected and in accordance with the
BHC’s policies and procedures. Internal audit
should review the manner in which CAP deficien
cies are identified, tracked, and remediated.
Principle 6: The BHC has robust internal controls
governing capital adequacy process components,
including policies and procedures; change control;
model validation and independent review; compre
hensive documentation; and review by internal audit.
• The internal control framework should encompass
the entire CAP, including the risk measurement
and management systems used to produce input
data, the models and other techniques used to esti
mate loss and resource estimates, the process for
making capital adequacy decisions, and the aggre
gation and reporting framework used to produce
management and board reporting. The set of con
trol functions in place should provide confirmation
Principle 7: The BHC has effective board and senior
management oversight of the CAP, including peri
odic review of the BHC’s risk infrastructure and lossand resource-estimation methodologies; evaluation of
capital goals; assessment of the appropriateness of
stressful scenarios considered; regular review of any
limitations and uncertainties in all aspects of the
CAP; and approval of capital decisions.
• The board of directors should make informed deci
sions on capital adequacy for its BHC by receiving
22
CapPR Summary Instructions 2013
sufficient information detailing the risks the BHC
faces, its exposures and activities, and the impact
that loss and resource estimates may have on its
capital position.
• Information provided to the board about capital
adequacy should be framed against the capital
goals established by the BHC and by obligations to
external stakeholders, and consider capital
adequacy for the BHC with respect to the current
circumstances as well as on a pro forma, post-stress
basis.
• The information the board of directors reviews
should include a representation of key limitations,
assumptions, and uncertainties within the CAP,
enabling the board to have the perspective to effec
tively understand and challenge reported results.
The board should take action when weaknesses in
the CAP are identified, giving full consideration to
the impact of those weaknesses in their capital
decisions.
• Senior management should ensure that all weak
nesses in the CAP are identified, as well as key
assumptions, limitations, and uncertainties, and
evaluate them for materiality (both individually and
collectively). Senior management should also have
remediation plans for any weaknesses affecting
CAP reliability or results.
• Using appropriate information, senior manage
ment should make informed recommendations to
the board of directors about the BHC’s capital,
including capital goals and distribution decisions.
Senior management should include supporting
information to highlight key assumptions, limita
tions, and uncertainties in the CAP that may affect
capital decisions.
• A BHC should appropriately document the key
decisions about capital adequacy—including capi
tal actions—made by the board of directors and
senior management, and describe the information
used to make those decisions.
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