Most Banks Pass Fed's Capital Review as Aggregate Tier 1 Capital Rises

The Federal Reserve approved the capital plans of 25 of the largest bank holding companies in the U.S. participating in the Comprehensive Capital Analysis and Review (CCAR), while Citigroup, HSBC North America, RBS Citizens, Santander USA and Zions did not meet the Fed’s approval.

Specifically, the Fed objected to Citigroup’s plans because although the firm “has made considerable progress in improving its general risk-management and control practices over the past several years, its 2014 capital plan reflected a number of deficiencies in its capital planning practices,” the central bank said. These deficiencies include Citigroup’s ability to project revenue and losses under a stressful scenario and its ability to develop adequate scenarios for its internal stress testing.

For HSBC, RBS Citizens and Santander, the Fed rejected their plans due to “significant deficiencies” in their capital planning processes, with inadequate governance and weak internal controls around the processes. The Fed said HSBC and RBS Citizens had deficient practices for estimating revenue and losses under a stress scenario, while Santander also had deficiencies in areas such as risk identification and risk management, management information system, and assumptions and analysis supporting their capital planning process. The Fed objected to the capital plan of Zions because the firm did not pass the stress test threshold of a 5% tier 1 common ratio under a severely adverse scenario.

For those institutions who did not gain approval, they are required to resubmit their plans and can only make capital distributions with prior written approval from the Fed. When this has happened in the past, the Fed usually only approves capital distributions in line with what the firm did the previous year.

The CCAR, now in its fourth year, evaluates banks’ capital planning processes and capital adequacy to ensure that they have the ability to lend in times of economic difficulty. The 30 firms in the review have a combined $13.5 trillion in assets, which is about 80% of all U.S. bank holding company assets. The Fed considers both qualitative and quantitative factors including a firm’s capital ratios under stress scenarios and the strength of the firm’s capital planning process (for nine quarters, starting from the end of 2013 to the end of 2015).

Since the first set of government stress tests in 2009, U.S. firms have substantially increased their capital, with the aggregate tier 1 common equity ratio (which compares high-quality capital to risk-weighted assets) of the banks in the 2014 CCAR more than doubling from 5.5% in the first quarter of 2009 to 11.6% in the fourth quarter of 2013 (excluding Santander, who was not counted prior to 2012). The total tier 1 common equity has increased from $511 billion to $971 billion during this time, and the Fed anticipates this trend continuing, as 28 out of the 30 CCAR participants are expected to build capital from the second quarter of 2014 through the first quarter of 2015. In aggregate, the firms are expected to distribute 40% less than their projected net income during the same period.

“The Federal Reserve’s annual capital plan assessment provides a structured and comparative way to promote and assess the capacity of large bank holding companies to understand and manage their capital positions,” says Federal Reserve Governor Daniel Tarullo. “With each year we have seen broad improvement in the industry’s ability to assess its capital needs under stress and continuing improvements to the risk-measurement and -management practices that support good capital planning. However, both the firms and supervisors have more work to do as we continue to raise expectations for the quality of risk management in the nation’s largest banks.”