By Dongliang “Larry” Yi
The Origin of CCAR
The 2008 financial crisis is considered to be the worst financial crisis
since the Great Depression of the 1930s. [1] It caused banks to be
acquired or bankrupted, including Lehman Brothers and Merrill Lynch.
Concerns on bank solvency, falls in credit availability and impaired investor confidence
affected worldwide equity markets, where investors experienced huge losses
during 2008 and early 2009. Economies worldwide slowed during this period, as
credit tightened and international trade dropped. US government bailout banks
and prevented the collapse of US financial system. [2]
This bailout is called Troubled Asset Relief Program
(TARP) in which US government purchased toxic assets from financial
institutions to help stabilize the US financial system and restart economic
growth. The Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank) was passed to protect money spent in TARP. [2] In Nov.
2011, Comprehensive Capital Analysis and Review (CCAR) is introduced by the
Federal Reserve in order to measure, regulate, and supervise large Bank Holding
Companies (BHCs). [3] The Federal Reserve want to ensure that BHCs
have vigorous processes for determining how much capital they need to maintain
access to funding and continue to function as credit intermediaries, even under
adverse situations. [4]
What is included?
CCAR is the Federal Reserve’s primary supervisory instrument for
assessing the capital adequacy of big, complex BHCs. All US-domiciled BHCs with
assets of equal to or more than $50 billion are required to develop and submit yearly
capital plans to the Federal Reserve.
According to the capital plans rule, the plan submitted to the Federal
Reserves must include four elements: [3][4]
- A detail description of the BHC’s process for assessing capital sufficiency (capital ratios & tier 1 common ratio)
- The BHC’s capital policy used for capital planning, including dividend payments and share repurchases
- A description of the BHC’s planned capital actions that would affect its capital resources
- The BHC’s own assessment of the sources and uses of capital over a nine-quarter planning horizon under both expected and adverse economic conditions.
The Federal Reserves also made its own projection of each BHC’s losses,
revenue, and capital under hypothetical economic conditions – these are called
“stress test”. It can be both quantitative (loss and revenue) and qualitative (robustness
of process). The stress test result will be released by the Federal Reserve months
after submission from BHCs.
Why investors care about CCAR
result?
The Federal Reserve released this year’s CCAR result in Jun. 2016. The
capital distribution plans proposed by Deutsche Bank and Santander were objected
by the Federal Reserve based on qualitative concerns. The Federal Reserve did
not object to the capital plan of Morgan Stanley, but required the bank to
resubmit a capital plan by the end of 2016 to address certain weakness in its
capital planning process. [5]
Because of objection from the Federal Reserve, neither Deutsche Bank nor Santander can issue dividends or make share buybacks until they establish a
new plan. This is why investors of BHCs care about CCAR results of banks in
their portfolio. [5][6]
References:
[1] "Two top economists agree 2009 worst financial crisis
since great depression; risks increase if right steps are not taken". Reuters. 27 February 2009.
[3] “Comprehensive Capital Analysis and Review: Objectives and Overview”,
March 18, 2011, Board of Governors of the Federal Reserve System
[5] “Comprehensive Capital Analysis and Review 2016: Assessment
Framework and Results”, June 2016, Board of Governors of the Federal Reserve
System
[6] “What 2016 CCAR Stress-Test results mean to the dividend-seeking Investors?”, Gurpreet Singh, July 23, 2016
[6] “What 2016 CCAR Stress-Test results mean to the dividend-seeking Investors?”, Gurpreet Singh, July 23, 2016
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