In its annual Comprehensive Capital Analysis and Review ("CCAR"), the Board of Governors of the Federal Reserve System ("FRB") evaluated the capital adequacy of large U.S. bank holding companies ("BHCs").

The FRB evaluated a BHC's capital adequacy on a forward-looking, post-stress basis by reviewing the BHC's ability to "maintain capital above all minimum regulatory capital requirements" under stressful conditions. This year's simulated stressful conditions included (i) increasing the U.S. unemployment rate to 10%, and (ii) decreasing the stock market's value by half. On balance, the FRB found that most participating BHCs' capital-planning processes have strengthened since 2015.

The FRB noted that improvements were evident particularly for large and non-complex BHCs that were subject to the qualitative evaluation during the 2016 program. Those institutions generally were able to (i) remediate outstanding concerns with respect to loss and revenue estimation approaches used for their internal stress tests, (ii) ensure the appropriate consideration of their material risks in stress testing, and (iii) extend the coverage of key controls and governance processes to the material elements of their capital-planning processes.

The FRB also observed that many BHCs continue to fall short of meeting the higher supervisory expectations that are in place for the largest firms, including the development and maintenance of:

  • satisfactory risk identification processes that link the risks associated with their specific business activities to their vulnerabilities under stress;
  • their capacity for the critical assessment of weaknesses in their stress-scenario assumptions and stress-testing results; and
  • strong internal controls for various elements of capital planning.

In addition, the FRB emphasized that a number of the largest BHCs exhibit weaknesses in their internal audit programs for capital planning, and asserted that this could limit the BHC's effectiveness when assessing the quality of the key components of their capital planning practices. The FRB stated that later in 2016, it plans to conduct a thorough review of the largest firms' internal audit coverage of capital planning practices.

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