On June 25, the Federal Reserve released firm-specific results from the Dodd-Frank Act Stress Tests and the Comprehensive Capital Analysis and Review, along with aggregate results of a “sensitivity analysis” aimed at gauging the ongoing economic impact of the COVID-19 pandemic on CCAR firms.
These are the first results under the Federal Reserve’s revised stress testing framework, which integrates supervisory stress testing results into CCAR firms’ day-to-day capital requirements through the introduction of a “stress capital buffer” requirement intended to take effect October 1, 2020.
The DFAST and CCAR results indicated that the U.S. banking industry is still strongly capitalized. But the combination of the Federal Reserve’s sensitivity analysis (which yielded greater losses generally for the banking industry over near-term, pandemic-induced economic challenges) and the significant uncertainty in the probable future path of the economy, appears to have convinced the Federal Reserve to impose additional restrictions and requirements on CCAR firms. In particular, until further notice (or at least through the third quarter of 2020):
In addition, each CCAR firm is required to resubmit its capital plan “later this year”, and is urged to reconsider long-term capital plans. The resubmission will be based economic scenarios that the Federal Reserve has not yet released.
This resubmission requirement and the accompanying restrictions on capital distributions are not discussed in detail in the materials released yesterday, leading to significant uncertainty regarding both future planning and the timing of any forthcoming Federal Reserve guidance.
This Memorandum highlights several of the key considerations and ambiguities for CCAR firms.