Bank Capital Plans: Federal Reserve Board Issues Guidance Outlining Supervisory Expectations for Capital Planning at Large Bank Holding Companies

Sullivan & Cromwell LLP - September 11, 2013

The Federal Reserve recently published a guidance document entitled “Capital Planning at Large Bank Holding Companies: Supervisory Expectations and Range of Current Practice” (the “Guidance”). The Guidance sets forth observations regarding the qualitative capital planning processes and related measures at the large bank holding companies (“BHCs”) which participated in the 2013 Comprehensive Capital Analysis and Review (“CCAR”) process. It also outlines the Federal Reserve’s expectations and “best practices” for internal capital planning at BHCs subject to the 2014 CCAR process and the Federal Reserve’s capital plan rule (“Capital Plan Rule”)—generally institutions with more than $50 billion in consolidated assets—going forward. The Guidance is intended to provide “a more comprehensive set of criteria to assist BHC management in assessing their current capital planning processes and in designing and implementing improvements to those processes.” The qualitative planning issues discussed in the Guidance will likely be crucial elements in the Federal Reserve’s evaluation of capital plans and the 2014 CCAR process. This is because the Federal Reserve will thoroughly review the qualitative elements of an institution’s capital plan and may reject capital plans that do not adequately reflect the Federal Reserve’s expectations in this area, notwithstanding that an institution’s capital plan satisfies the Capital Plan Rule’s quantitative minimum stressed capital requirements under the severely adverse scenario. Although the Guidance is directed at institutions subject to the Capital Plan Rule, it may also be of relevance to the capital planning processes of smaller institutions going forward.

In analyzing the range of practices it observed during the 2013 CCAR process, the Federal Reserve finds that, although large BHCs have “made substantial improvements in capital planning,” a number of firms need to improve various aspects of their capital planning process. Throughout the Guidance, the Federal Reserve stresses key areas and specifically highlights the practices it views as indicative of “stronger” versus “weaker” qualitative capital planning processes and methodologies, including:

  • BHC Specific Risk Sensitivity: The Federal Reserve notes that a robust internal capital planning process should be centered on considerations and assumptions that reflect BHC-specific—as opposed to generic, industry-wide—factors.
    • Stronger: Stronger practices generally include the incorporation of many BHC-specific assumptions and factors in the capital planning process. Institutions engaging in such practices generally include geographic, macroeconomic, portfolio risk, and product considerations specific to the BHC in their capital planning process.
    • Weaker: Institutions with weaker practices tend to rely on generic assumptions or “standard” modeling techniques without consideration of BHC-specific assumptions, particularly where the Federal Reserve could itself identify material risks and vulnerabilities unique to the institution.
  • Capital Planning Governance Process: The Federal Reserve indicates that the capital planning process should have “strong board and senior management oversight.”
    • Stronger: The Guidance stresses that institutions with stronger capital planning governance processes: (i) tend to have a robust internal audit of the capital planning processes and controls; (ii) clearly delineate all material aspects of the capital planning decision-making process and document all capital planning decisions (including the models and assumptions used); and (iii) demonstrate a high degree of board of directors oversight.
    • Weaker: Institutions with weaker practices tend to: (i) not document their capital planning processes and procedures; (ii) rely heavily on third-party expertise (including scenario development and review); and (iii) not have proper board of directors engagement and oversight into the capital planning process.
  • Analytical Support of Capital Needs: According to the Federal Reserve, a comprehensive capital plan should accurately show how material risks and vulnerabilities are accounted for and accurately document how the BHC arrived at its capital goals and projections.
    • Stronger: The capital plans of institutions with stronger practices demonstrate a clear understanding of the BHC’s material risks—both current and future—and ensure that their capital projections and goals accurately reflected such risks.
    • Weaker: Institutions with lagging practices do not account for all materials risks and tend to lack sufficient documentation supporting their projections and assumptions.