Fed Announces Annual Capital Review of Biggest Banks

Fed Announces Annual Capital Review of Biggest Banks

Federal ReserveThe Federal Reserve Board on November 22 issued a final rule requiring the nation's largest bank holding companies to submit annual capital plans for Fed review.

The Federal Reserve will evaluate institutions with at least $50 billion in consolidated assets for capital adequacy and will examine the firms' internal capital assessment processes and their plans to make capital distributions, such as dividend payments or stock repurchases.

Criteria for capital distributions set
The Federal Reserve will approve dividend increases or other capital distributions for companies that meet these criteria: those whose capital plans are approved by supervisors, and firms that are able to demonstrate the financial strength to operate as successful financial intermediaries under difficult macroeconomic and financial market scenarios, even after they make their capital distributions. 

Boards of directors of the institutions will be required to review and approve annual capital plans before submitting them to the Federal Reserve.

Anticipating future stress tests
In addition to the annual capital review, the Federal Reserve launched the 2012 Comprehensive Capital Analysis and Review (CCAR) by issuing instructions to the firms. Those instructions include the macroeconomic and financial market scenarios the Fed is requiring institutions to use in the stress testing incorporated in their internal capital plans. In 2012, the Federal Reserve will conduct a supervisory stress test based on the same scenario to analyze the adequacy of the firms' capital.

The economic and markets scenario is not the Federal Reserve's economic forecast. Rather, it is meant to represent an outcome that, while unlikely, could materialize if the U.S economy and other major economies simultaneously fall into a deep recession.

Capital is central to a bank holding company's ability to absorb unexpected losses and continue to lend to creditworthy businesses and consumers. The Federal Reserve expects large, complex bank holding companies to hold sufficient capital to maintain access to funding, continue to serve as credit intermediaries, meet their obligations to creditors and counterparties, and continue operations, even in an adverse environment.

November 30, 2011