Bank Capital Plans : Federal Reserve Board Issues Final Rule Regarding Capital Plan and Formal Stress Test Requirements for Certain Large Bank Holding Companies

Sullivan & Cromwell LLP - November 29, 2011

On November 22, 2011, the Board of Governors of the Federal Reserve System (the “Board”) published a final rule (the “Final CCAR Rule”) requiring most bank holding companies (“BHCs”) with $50 billion or more of total consolidated assets (“Covered BHCs”) to submit annual capital plans, with their related stress test requirements, to the appropriate Federal Reserve Bank and to generally obtain regulatory approval before making capital distributions, which include dividends and purchases of capital securities and instruments. The Final CCAR Rule expands the capital plan requirements from 19 to 34 BHCs, including, for the first time, foreign-owned BHCs. In addition, the Board released (i) two sets of instructions (the “Instructions”) that provide guidance on compliance with capital requirements in the Final CCAR Rule, one for Covered BHCs that did not participate in the 2011 Comprehensive Capital Analysis and Review (“CCAR” and such BHCs, the “non-CCAR BHCs”) and another for the 19 Covered BHCs that participated in the 2011 CCAR (the “CCAR BHCs”) and (ii) the data templates (namely, the FR Y-14A and FR Y-14Q) that will be used to collect data from the CCAR BHCs to support the data collection contemplated by the Final CCAR Rule. The Final CCAR Rule generally incorporates the core features of the Board’s June 17, 2011 proposal regarding capital planning (the “Proposed CCAR Rule”).

As part of the capital planning exercise, Covered BHCs on an annual basis must submit comprehensive capital plans, including pro forma capital analyses and supporting projections, based on four scenarios – a BHC-defined baseline scenario; a baseline scenario provided by the Board; at least one BHC-defined stressed scenario; and a stressed scenario provided by the Board. In addition, six BHCs with large trading operations (the “Trading BHCs”) will be required to estimate potential losses stemming from a hypothetical global market shock based on market price movements seen during the second half of 2008, with adjustments made to incorporate potential sharp market price movements in European sovereign and financial sectors.

The Final CCAR Rule will become effective December 30, 2011. Covered BHCs will be required to submit their first comprehensive capital plans under the Final CCAR Rule by January 9, 2012, covering the nine quarter period commencing with the fourth quarter of 2011 and ending with the fourth quarter of 2013.

Although the Final CCAR Rule only applies to large BHCs with over $50 billion in assets, it remains to be seen whether the Board will, over time, come to expect BHCs that do not technically meet the size requirement to adopt some portions of the capital planning and stress test methodologies of the Final CCAR Rule as part of their own policies and procedures as a prudential supervisory matter.