FRB announces banks must complete 2nd CCAR in 2020
- 15 July 2020
FRB publishes latest CCAR results
The Federal Reserve Board (FRB) released the 2020 Comprehensive Capital Analysis and Review (CCAR) stress testing results at the end of June, and with it were a few surprises. The CCAR stress test is an assessment of whether a firm has enough ‘money in the bank’ to continue operating, considering all its current obligations, in the event of an economic or financial market stress.
High-level results of findings
This year, the FRB did not object to the submissions based on stress variables which were released to all of the banks to test against in February 2020. Importantly however, this was before coronavirus impacted the US. The FRB have recognized that the variables did not reflect what has become current conditions (i.e. unemployment rate numbers, interest rates). As a result, they conducted their own sensitivity analysis which resulted in an unprecedented decision – that firms must resubmit CCAR again in 2020.
Sensitivity analysis impacts
Due to the economic uncertainty the US and the rest of the world are facing, the FRB conducted a sensitivity analyses to assess the economic strength of the US banking system.
Based on these findings paired with current conditions, the FRB announced that all banks who submitted CCAR this year would be required to resubmit their CCAR plans again before the end of the year.
This second CCAR submission will be tested against new variables which have not yet been released. The new submission will be required within just 45 days from the release of the variables.
In the meantime, the FRB will suspend share repurchases and cap dividends. It was also stated that the FRB may continue these restrictions on a quarter-by-quarter assessment basis as conditions unfold.
How does ORX support banks with CCAR?
We held one of our regular CCAR group calls on the day after the FRB released its results and sensitivity analysis. During this call, it was agreed that the best way to support our CCAR community was to release the results of our annual CCAR benchmark earlier than planned. This means the findings will be available prior to the FRB’s release of the new variables. Participants of the CCAR benchmark will receive the full report and individual factsheets and we'll release a public summary of the results.
A second ORX CCAR benchmark
After the second submission has been completed, we'll conduct a short follow-up study with dates dependent on the next stress test. This study will briefly cover changes made to banks’ CCAR submissions and discuss preparations going into 2021.
Much of the content will depend on the variables the FRB releases and any outcomes and lessons learned from this second submission. This benchmark is open to our members and non-members alike, so if your firm is subject to CCAR please do get in touch to find out more.
How does CCAR work?
This assessment takes a rigorous look at the capital adequacy and planning practices of large financial institutions operating in the US. There are two parts to the test – the quantitative and the qualitative review. The quantitative portion of the review looks at a firm’s ability to hold capital ratios above the regulatory capital requirements through stressful conditions throughout their planning horizon.
The qualitative portion looks at internal practices, such as identifying risks, implementing strong controls, and oversight, with a focus on the overall strength of risk management within the firm. Decisions related to capital planning must take a forward-looking approach, with an eye for the individual firm’s business activities and the risk profile that results from them.
Who has to do the stress test?
The FRB has created a grouping of banks based on asset value and complexity. There are five categories, four of which submit for CCAR. The banks in these four categories have an asset value greater than $100bn. In 2020, 33 banks were required to submit.
The level of bank asset size and complexity decreases from category 1 to category 4 firms, and the requirements for submissions decrease as well. For instance, category 1 firms are the highest asset value and most complex and are subject to the highest level of scrutiny and requirements, while category 4 firms submit to CCAR but have less requirements than the other categories.