The FRB has finalized its rules for the Comprehensive Capital Analysis and Review (CCAR), and other stress tests confirming a new schedule starting in 2015 and reiterating that capital distributions are dependent in part on the ability of large BHCs to raise planned capital. The Board has also issued new supervisory guidance, reiterating the importance of governance and qualitative standards in the stress-test process. Taken together, the Board’s standards are very stringent and will likely further limit capital distributions by large U.S. BHCs and state member banks, as well as from foreign banking organizations and other holding companies subject to the Federal Reserve. Because of the importance investors place on capital distributions, limits on them will affect market capitalization unless covered firms find strategic paths to meet both the FRB’s expectations and investor demands. Revisions in asset holdings and distribution plans are likely, with the increasingly-stringent qualitative standards governing these plans also requiring new governance, modelling, and risk-management procedures. Because the new approach focuses more than in the past on operational and interest-rate risk, additional internal capabilities in these areas will be a top priority for both the current stress-test cycle and those to come. However, future tests could be even more challenging if the FRB implements actions under consideration to use these tests not only to ensure the resilience of individual BHCs, but also to address macroprudential concerns like asset bubbles.
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