Bank Capital Plans and Stress Tests: Federal Reserve Board Issues Consolidated Guidance on Supervisory Expectations for Capital Planning at Large Bank Holding Companies

Sullivan & Cromwell LLP - December 30, 2015

Last week, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) published two guidance letters (the “SR Letters”) describing the Federal Reserve’s core supervisory expectations for capital planning and stress testing by U.S. bank holding companies (“BHCs”) and intermediate holding companies (“IHCs”) of foreign banking organizations that are or will become subject to the capital plan rule and related supervisory stress testing. The SR Letters differentiate such guidance based on the size of the firm and whether the firm is part of the Federal Reserve’s Large Institution Supervision Coordinating Committee (“LISCC”) framework. SR Letter 15-18 is applicable to BHCs and IHCs of foreign banking organizations that are either subject to the LISCC framework (“LISCC Firms”) or have total consolidated assets of $250 billion or more or consolidated total on-balance sheet foreign exposure of $10 billion or more (“Large and Complex Firms”). SR Letter 15-19 applies to BHCs and IHCs of foreign banking organizations that have total consolidated assets of at least $50 billion but less than $250 billion, have consolidated total on-balance sheet foreign exposure of less than $10 billion, and are not LISCC Firms (“Large and Noncomplex Firms”).

While the SR Letters largely consolidate the Federal Reserve’s existing capital planning guidance and other communications, they provide additional clarity on the differences between supervisory expectations for LISCC Firms and Large and Complex Firms, on the one hand, and Large and Noncomplex Firms, on the other, reflecting the Federal Reserve’s general position that LISCC Firms and Large and Complex Firms are subject to higher expectations than Large and Noncomplex Firms for capital planning, including stress testing, purposes. In addition, SR Letter 15-18 makes clear that the guidance set forth therein “sets forth only minimum expectations, and LISCC Firms [emphasis added] are consistently expected to exceed those minimum standards and have the most sophisticated, comprehensive, and robust capital planning practices for all of their portfolios and activities.” The SR Letters also reflect further emphasis by the Federal Reserve in various topical areas, as discussed further below.

The guidance in the SR Letters is effective immediately for BHCs that are subject to the Federal Reserve’s capital plan rule as of January 1, 2016 and will become effective for IHCs beginning on January 1, 2017, which is the date on which the capital plan rule applies to these firms. The SR Letters do not apply to non-bank financial companies designated by the Financial Stability Oversight Council for supervision by the Federal Reserve. The SR Letters note that capital planning guidance for these companies may be issued at a later date.

Banking institutions immediately subject to the SR Letters should carefully review their capital planning processes and 2016 capital plan components drafted to date in light of the SR Letters’ guidance in order to incorporate the Federal Reserve’s expectations into their plans to the extent feasible prior to the April 5, 2016 submission deadline. Going forward, all BHCs, as well as IHCs that will be submitting their first capital plans for the 2017 Comprehensive Capital Analysis and Review process, should thoroughly evaluate the guidance in the SR Letters and integrate it in their capital planning and stress testing programs in a comprehensive manner to the extent they have not already done so on the basis of Federal Reserve pronouncements.

A comparison of the text of SR Letter 15-18 (for LISCC Firms and Large and Complex Firms) versus SR Letter 15-19 (for Large and Noncomplex Firms) is attached as Annex A hereto.