The US Federal Reserve Board has announced it has completed its review of the capital planning practices of the nation’s largest banks and reports that their ratios have more than doubled from 5.5 percent in the first quarter of 2009 to 12.5 per-cent in the fourth quarter of 2016.
Each US bank is listed, so we can make comparisons, unlike the “behind closed door” arrangements in Australia, where regulatory disclosure is so poor.
CCAR, in its seventh year, evaluates the capital planning processes and capital adequacy of the largest U.S.-based bank holding companies, including the firms’ planned capital actions such as dividend payments and share buybacks. Strong capital levels act as a cushion to absorb losses and help ensure that banking organizations have the ability to lend to households and businesses even in times of stress.
“I’m pleased that the CCAR process has motivated all of the largest banks to achieve healthy capital levels and most to substantially improve their capital planning processes,” said Governor Jerome H. Powell.
Figure A provides the aggregate ratio of common equity capital to risk-weighted assets for the firms in CCAR from 2009 through the fourth quarter of 2016. This ratio has more than doubled from 5.5 percent in the first quarter of 2009 to 12.5 per-cent in the fourth quarter of 2016. That gain reflects a total increase of more than $750 billion in common equity capital from the beginning of 2009 among these firms, bringing their total common equity capital to over $1.2 trillion in the fourth quarter of 2016.
The decline in the common equity ratio in the first quarter of 2015 resulted from the incorporation of risk-weighted assets calculated under the standardized approach under the capital rules that the Board adopted in 2013, which had a one-time effect of reducing all risk-based capital ratios. However, the aggregate common equity capital ratio of the 34 firms increased by around 65 basis points between the first quarter of 2015 and the fourth quarter of 2015. Previously, risk-weighted assets were calculated under a prior version of the capital rules.
In the aggregate, the 34 firms participating in CCAR 2017 have estimated that their common equity will remain near current levels between the third quarter of 2017 and the second quarter of 2018, based on their planned capital actions and net income projections under their baseline scenario.
When considering a firm’s capital plan, the Federal Reserve considers both quantitative and qualitative factors. Quantitative factors include a firm’s projected capital ratios under a hypothetical scenario of severe economic and financial market stress. Qualitative factors include the strength of the firm’s capital planning process, which incorporate risk management, internal controls, and governance practices that support the process.
This year, 13 of the largest and most complex banks were subject to both the quantitative and qualitative assessments. The 21 other firms in CCAR were subject only to the quantitative assessment. The Federal Reserve may object to a capital plan based on quantitative or qualitative concerns, and if it does, a firm may not make any capital distribution unless authorized by the Federal Reserve.
The Federal Reserve did not object to the capital plans of Ally Financial, Inc.; American Express Company; BancWest Corporation; Bank of America Corporation; The Bank of New York Mellon Corporation; BB&T Corporation; BBVA Compass Bancshares, Inc.; BMO Financial Corp.; CIT Group Inc.; Citigroup, Inc.; Citizens Financial Group; Comerica Incorporated; Deutsche Bank Trust Corporation; Discover Financial Services; Fifth Third Bancorp; Goldman Sachs Group, Inc.; HSBC North America Holdings, Inc.; Huntington Bancshares, Inc.; JP Morgan Chase & Co.; Keycorp; M&T Bank Corporation; Morgan Stanley; MUFG Americas Holdings Corporation; Northern Trust Corp.; The PNC Financial Services Group, Inc.; Regions Financial Corporation; Santander Holdings USA, Inc.; State Street Corporation; SunTrust Banks, Inc.; TD Group US Holdings LLC; U.S. Bancorp; Wells Fargo & Company; and Zions Bancorporation.
The Federal Reserve did not object to the capital plan of Capital One Financial Corporation, but is requiring the firm to submit a new capital plan within six months that addresses identified weaknesses in its capital planning process.
