C C A R 2 0 1 6
EY Regula tory Alert
F eb r u ar y 2016
O n T h u r sday , J an u ar y 28 , 2016, t h e F eder al R eser ve B o ar d ( F R B )
p u b l i sh ed t h e C o m p r eh en si ve C ap i t al A n al y si s an d R evi ew ( C C A R ) 2016
i n st r u c t i o n s an d t h e su p er vi so r y sc en ar i o s f o r t h e an n u al st r ess t est s
r eq u i r ed u n der t h e D o dd-F r an k A c t st r ess t est ( D F A S T ) r u l es an d t h e
c ap i t al p l an r u l e1 t h at ap p l y t o t h e 33 b an k h o l di n g c o m p an i es ( B H C s)
p ar t i c i p at i n g i n C C A R t h i s y ear .2 While there are no significant surprises in
the instructions, some new features in the CCAR 2016 scenarios warrant
particular attention. Specifically, the supervisory severely adverse scenario
introduces a period of negative short-term interest rates.
T e c h n ic a l in s t r u c t io n s r e in fo r c e t h e n o w - e x p lic it a n d
d iffe r e n t ia t e d e x p e c t a t io n s o f S R 1 5 - 1 8 a n d S R 1 5 - 1 9
T h e C C A R 2016 i n
H o w ever , t h ey c o n
am en dm en t s t o st
p u b l i sh ed si n c e C C
st r u c t i o n s ar e g en er al l y c o n si st en t w i t h l ast y ear ’ s C C A R ex er c i se.
t ai n addi t i o n al det ai l s o n h o w B H C s sh o u l d i m p l em en t t ec h n i c al
r ess t est an d c ap i t al r u l es an d r ei t er at e c h an g es f r o m u p dat ed g u i dan c e
A R 2015, i n c l u di n g :
• N
► ovember25,2015amendmentstothecapitalplanandstresstestingrules
• D
► ecember21,2015supervisorylettersSR15-18andSR15-193
• J
► anuary21,2016updatestotheFRY-14A/Q/MInstructions
W h i l e t h e sc en ar i o s m ay i m p ac t t h e ab i l i t y f o r B H C s’ t o m eet q u an t i t at i ve r eq u i r em en t s
underCCAR,SR15-18andSR15-19reinforcethehighsupervisoryexpectationsthatform
t h e b asi s o f t h e F R B ’ s q u al i t at i ve C C A R assessm en t .
http://www.federalreserve.gov/newsevents/press/bcreg/20160128a.htm
A p p l i c ab i l i t y : 31 C C A R B H C s f r o m l ast y ear p l u s t w o n ew p ar t i c i p an t s: B an c W est C o r p o r at i o n an d T D G r o u p U S
HoldingsLLC.Thesame6USglobalsystemicallyimportantbanks(G-SIBs)aslastyeararesubjecttotheFRB’s
GlobalMarketShock(GMS),andthesame8G-SIBsaslastyeararesubjecttotheFRB’sCounterpartyDefault
S c en ar i o c o m p o n en t .
3
ThenewguidancesupersedesSR09-4andSR99-18andprovides“core”expectationsforcapitalplanning,
w h i c h b u i l ds u p o n ex i st i n g m i n i m u m ex p ec t at i o n s p u b l i sh ed i n o t h er r eg u l at o r y g u i dan c e ( i .e., C C A R R an g e o f
CurrentPractices(2013),ComprehensiveCapitalAnalysisandReview2015SummaryInstructionsandGuidance,
InstructionsfortheCapitalAssessmentsandStressTestinginformationcollection,SR11-7,SRletter12-17/CA,
an d S R 13-1) .
1
2
K ey i ssu es h i g h l i g h t ed i n t h e C C A R 2016 i n st r u c t i o n s t h at w er e
p r evi o u sl y c o m m u n i c at ed i n c l u de:
R e it e r a t e d c h a n g e s f r o m N o v e m b e r 2 5 , 2 0 1 5 F in a l R u le
a m e n d in g t h e c a p it a l p la n a n d s t r e s s t e s t in g r u le s
• Removaloftier1commonratio,indefinitedelayofstressed
advan c ed ap p r o ac h es r i sk -w ei g h t ed asset c al c u l at i o n s, an d o n ey ear del ay f o r i n c o r p o r at i n g su p p l em en t ar y l ever ag e r at i o i n t o
stressprojections
• ModificationofDFASTcapitalactionassumptionstohighlight
t h e i n c o r p o r at i o n o f p l an n ed m er g er s an d ac q u i si t i o n s i n c ap i t al
projections
• R
► equirementtoincludeVolckerRuledeductionsfromregulatory
capitalinFRY-14Aschedules,asappropriate,overthenine-quarter
p l an n i n g h o r i z o n
H ig h lig h t e d k e y a r e a s f r o m
S R 1 5 -1 8 a n d S R 1 5 -1 9
TheSR15-18andSR15-19guidanceeffectivelysubdividesthe
current33CCARBHCsandfuturefilersintotwotiers,withhigher
expectationsforthefirsttierofLargeInstitutionSupervision
CoordinatingCommittee(LISCC)and“LargeandComplex”firms.4
R e fe re n c e d c h a n g e s fro m
Y - 1 4 A / Q / M s c h e d u le s
J a n u a r y 2 1 , 2 0 1 6 u p d a t e o f F R
• R eq u i r em en t t o p o p u l at e n ew S c h edu l e F ( B u si n ess P l an C h an g es)
withplanned“material”businesschanges(e.g.,merger,acquisition,
di vest i t u r e) f o r t h e 2016 C C A R c y c l e, f o r m al i z i n g i n f o r m at i o n t h at
h ad b een c ap t u r ed i n p r i o r C C A R c y c l es o n an ad-h o c b asi s.
• C
► FOattestation(whichwillstartDecember31,2016,for
FRY-14A/Q/Msasofthatdate)forninecurrentandseven
futureLISCCfirmsfocusingonattestationthat:
• P
► rojectionsandactualsdataispreparedinconformance
w i t h F R B i n st r u c t i o n s
• D
► ataismateriallyaccurateandsupportedbyeffectiveinternal
c o n t r o l s an d r evi ew s b y sen i o r m an ag em en t , an d t h at m at er i al
w eak n esses an d er r o r s i n dat a ar e p r o m p t l y r ep o r t ed t o t h e F R B
astheyareidentified
S R 1 5 - 1 8 h as en h an c ed em p h asi s an d r el at i vel y h i g h er
expectationsforLISCCandLargeandComplexfirmsinthe
areasofmodeling,riskidentification,datamanagementand
g o ver n an c e. H i g h l i g h t s i n c l u de:
• H
► igherexpectationstowardusage of models and q uantitative
methods f o r l o sses, b al an c e sh eet an d p r e-p r o vi si o n n et
r even u e i n c l u di n g i n c r eased sc r u t i n y o n assumptions i n
b al an c e sh eet f o r ec ast i n g
• E
► xpectationtoevaluateriskidentificationandassessmentat
l east q uarterly
• E
► xpectationtousemultiple internal scenarios ac r o ss m at er i al
r i sk s i n o n g o i n g c ap i t al p l an n i n g
• E
► levatedexpectationsoncontrolsrelatedtoq ualitative
approaches and overlays
• E
► levatedexpectationsonmodel perf ormance assessment
( p o t en t i al addi t i o n al sensitivity testing)
• E
► nhancedstandardsfortheuseofb enchmark models i n
c ap i t al p l an n i n g
• I► ncreasedengagementoftheRWAproductionfunctioninthe
projectionsofstandardized RW A
• S
► pecificrequirementforseniormanagementtoreviewthe
c ap i t al p l an n i n g p r o c ess q uarterly
• R
► e-emphasison internal audit’ sroleinevaluatingthefirm’s
c ap i t al p l an n i n g p r o c ess an d su p p o r t i n g r i sk -m an ag em en t an d
i n t er n al c o n t r o l p r ac t i c es
• M
► oreemphasisonuseofscenariosforoperational risk loss
proj ections
• E
► levatedexpectationsonuseofinternal data
S R 1 5 - 1 9 includesdifferentiatedexpectationsfor“Largeand
Noncomplex”firmsprimarilyinthefollowingareas:
• U
► seofquantitativeapproaches
• U
► seofinternaldata
• U
► seofbenchmarkmodels
• O
► perationalrisklossprojections
• T
► radingexposures
• V
► alidationofvendormodels
• R
► WAprojections
“LISCCFirmsand“LargeandComplexFirms”aredefinedasUSBHCsandintermediate
holdingcompanies(IHCs)ofFBOsthathavetotalconsolidatedassetsgreaterthan$250
billion,haveconsolidatedtotalon-balancesheetforeignexposuregreaterthan$10
billionand/oraresubjecttotheFederalReserve’sLISCC.“LargeandComplex”appliesto
slightlylessthanhalfofthecurrent33CCARfirms.“LargeandNoncomplexFirms”are
definedasUSBHCsandIHCsofFBOsthathavetotalconsolidatedassetsgreaterthan
$10billionbutlessthan$250billion,haveconsolidatedtotalon-balancesheetforeign
exposurelessthan$10billionandarenotsubjecttotheFederalReserve’sLISCC.The
remainingCCARfirmsaredesignated“LargeandNoncomplex.”
4
2
| ©2016 Ernst & Young LLP. All Rights Reserved.
O t h e r n o t e w o r t h y it e m s in t h e in s t r u c t io n s
• C
► CARwillbeintegratedintotheFRB’songoingsupervisoryactivitiesconductedthroughouttheyear,andongoingreviewswillbefocused
specificallyonriskmanagement,internalcontrols,auditandcorporategovernance.
• T
► hequalitativeassessmentforCCAR2016willfocusonareashighlightedinSR15-18andSR15-19,includinggovernance,risk
management,internalcontrols,capitalpolicies,scenariodesignandprojectionmethodologies.
• R
► elatedtobankholdingcompany(BHC)baselineplannedcapitalactions,BHCsmayincludelowerdistributionsinthesecondquarterofthe
p l an n i n g c y c l e b u t c an n o t , w i t h o u t F R B ap p r o val , i n c l u de o r ex ec u t e a l ar g er am o u n t o f c ap i t al di st r i b u t i o n s t h an i n t h e p r i o r y ear ’ s c ap i t al
p l an .
• B
► HCsareexpectedtoreflectconservativecommondividendpayoutratiosintheircapitalplans.Payoutratiosabove30%willreceivehigher
scrutinyandwillbereviewedagainstaBHC’sabilitytomeetitsbaselineearningsprojections.
• U
► nlesseffectiveDecember31,2015,newaccountingstandardsshouldnotbereflectedinprojections.
• BHCsubsidiariesofforeignbankingorganizations(FBOs)thatwillbedesignatedastheUSintermediateholdingcompany(IHC)mustinclude
i n t h ei r c ap i t al p l an an assessm en t o f h o w t h e t r an sf er s o f su b si di ar y asset s an d l i ab i l i t i es w o u l d af f ec t t h e B H C ’ s c ap i t al adeq u ac y .
T h e C C A R 2 0 1 6 s c e n a r io s h a v e s o m e k e y d iffe r e n c e s in fe a t u r e s a n d s e v e r it y ,
in c lu d in g n e g a t iv e U S s h o r t - t e r m in t e r e s t r a t e s …
T h e F R B p r o vi ded t h e sam e 28 i n di c at o r s o f ec o n o m i c an d m ar k et
c o n di t i o n s t o desc r i b e t h e 2016 C C A R sc en ar i o s as i n 2015. T h e
globalmarketshock(GMS)riskfactorshocktemplateswerenot
releasedandareexpectedbyMarch1,2016asperRegulationYY.5
S u p e r v is o r y s e v e r e ly a d v e r s e (s e v e r e ly a d v e r s e ) s c e n a r io
T h e S ever el y A dver se S c en ar i o assu m es n eg at i ve U S sh o r t -t er m
i n t er est r at es an d a m o r e sever e do w n t u r n i n t h e U S ec o n o m y as
c o m p ar ed t o l ast y ear . T h e sc en ar i o i n c l u des a g l o b al r ec essi o n , w i t h
asevererecessioninthreeofthefourcountryblocks(US,EU,UK,
J ap an ) an d a m i l d r ec essi o n i n devel o p i n g A si a, an d a h ei g h t en ed
periodofcorporatefinancialstress.[See more detail on the severely
adverse scenario in Tables 1-9 on pages 5 and 6]
S u p e r v is o r y a d v e r s e (a d v e r s e ) s c e n a r io
TheAdverseScenarioassumesmilddeflationwithconsumerprices
fallingandlowerpathsofUSTreasuryyieldsrelativetolastyear.It
al so assu m es a m o der at e r ec essi o n i n t h e U S , b r o adl y c o n si st en t w i t h
l ast y ear ’ s adver se sc en ar i o , an d m o der at e r ec essi o n s i n t h e eu r o
ar ea, t h e U n i t ed K i n g do m , an d J ap an , as w el l as b el o w -t r en d g r o w t h
i n devel o p i n g A si a.
S u p e r v is o r y b a s e lin e ( b a s e lin e ) s c e n a r io
T h e B asel i n e S c en ar i o h as a m o der at e ec o n o m i c ex p an si o n i n t h e U S
an d i n t er n at i o n al l y at g r o w t h r at es an d l evel s si m i l ar t o l ast y ear ’ s
b asel i n e sc en ar i o .
5
http://www.ecfr.gov/cgi-bin/retrieveECFR?gp=&SID=cf69eb924cea74aac02264a0ea36
596d&r=PART&n=12y4.0.1.1.17#se12.4.252_154
G M S a n d c o u n t e r p a r t y d e fa u lt s e v e r e ly a d v e r s e s c e n a r io
6
The2016GMSseverelyadversescenarioisqualitativelydescribedin
t h e o ver al l sc en ar i o r el ease, w i t h h i g h l i g h t s i n c l u di n g :
• A
► suddensharpincreaseingeneralriskpremiumsandcreditrisk,
significantmarketilliquidityandthedistressofoneormorelarge
en t i t i es t h at r ap i dl y sel l a var i et y o f asset s i n t o a f r ag i l e m ar k et
• G
► eneraldeclineinUSTreasuryrates,resultinginnegativeshortt er m r at es
• P
► eak-to-troughassetvaluechangesthataregenerallycomparable
to2007–2009,withdeclinesinmarketslessaffectedby
det er i o r at i n g l i q u i di t y g en er al l y c o m p ar ab l e t o t h e sec o n d h al f
o f 2008
• B
► reakdownsinhistoricalbasisspreads,withspreadwidening
b et w een c ash an d t o -b e-an n o u n c ed ( T B A ) f o r w ar d m ar k et s an d
c o r p o r at e b o n ds an d c r edi t def au l t sw ap s
• L
► argerwideningofcreditspreadsformunicipal,sovereignand
advan c ed ec o n o m i es’ c o r p o r at e p r o du c t s an d g r eat er dec l i n es i n
t h e val u e o f p r i vat e eq u i t y i n vest m en t s, r ec en t l y i ssu ed sec u r i t i z ed
p r o du c t s an d n o n -ag en c y r esi den t i al m o r t g ag e-b ac k ed sec u r i t i es as
c o m p ar ed t o 2015
G M S a n d c o u n t e r p a r t y d e fa u lt a d v e r s e s c e n a r io
• T
► headversescenariosimulatesanextendedlowgrowth
en vi r o n m en t an d m u t ed vo l at i l i t y ac r o ss m o st asset c l asses an d
t er m st r u c t u r es. K ey c h an g es f r o m t h e 2015 adver se sc en ar i o
i n c l u de n ew el em en t s t h at ar e di st i n c t f r o m an d n o t m ec h an i c al l y
l i n k ed t o t h e sever el y adver se sc en ar i o s.
6
Note:theGMS“as-of”dateisJanuary4,2016,andsimilartoprioryear,banksmayuse
an al t er n at e as-o f dat e t h at c o r r esp o n ds t o t h ei r w eek l y i n t er n al r i sk r ep o r t i n g b et w een
January4–8,2016.
C C AR 2016 — EY Regula tory Alert |
3
…
a n d n e g a t iv e in t e r e s t r a t e s in t r o d u c e s o m e n e w a n a ly t ic a l c o n s id e r a t io n s
A k ey an al y t i c al c h al l en g e f o r C C A R 2016 w i l l c o m e f r o m t h e n eg at i ve 3-m o n t h T r easu r y r at e t h at em er g es i n t h e sec o n d q u ar t er o f t h e
nine-quarterseverelyadversescenarioandwillalsobeafeaturefortheGMSseverelyadversescenario.Negativeshort-terminterestrates
ar e a p h en o m en o n w h i c h h as n o t y et o c c u r r ed i n t h e U S b u t ar e o c c u r r i n g at t h e m o m en t i n sever al m ar k et s ar o u n d t h e w o r l d ( e.g ., i n t er b an k
marketsforCHF,DKK,EUR,JPYandSEK).NegativeUSshort-terminterestratesmayrequirefirmstochallengeandenhancetheoutputfrom
certainprojectionandvaluationmodels.
• S cenario expansion model adj ustments. S c en ar i o ex p an si o n m o del s u sed t o t r an sl at e t h e c o r e m ac r o ec o n o m i c var i ab l es o r m ar k et r i sk
factorstothefullsuiteofrevaluationorprojectionmodelinputparametersmayhavetobeexaminedtoassessiftheuseof“floors”or“lower
boundaries”insuchexpansionmodelswillneedmodificationtoaccommodatetheprojectionofnegativeinterestrates.
• PPN R (pre-provision net revenue) proj ection adj ustments.Modelsorotherapproachestoprojectincomeusingvariablesthataredirectlyor
c l o sel y r el at ed t o t h e 3-m o n t h T r easu r y r at e m ay n eed addi t i o n al r evi ew an d an al y si s, an d p o t en t i al o ver l ay s t o r esu l t s. A s n eg at i ve U S r at es
w o u l d n o t h ave f eat u r ed i n m o del h i st o r i c al devel o p m en t al dat a set s b an k s m ay w an t t o l o o k c l o sel y at t h e c al i b r at i o n o f t h ei r m o del s, an d
challengeresultsinthecontextofpotentialcustomer/counterpartybehaviorandproductpricinginthenegativeratescenario.
• Valuation model adj ustments.Certainvaluationmodelsforproductssuchasinterestratecaps/floorsandswaptionsmayrelyontraditional
l o g -n o r m al m o del s, w h i c h do n o t al l o w f o r n eg at i ve i n t er est r at e p ar am et er s. D ep en di n g o n w h i c h ( i f an y ) r at e sh o c k s r esu l t i n n eg at i ve
i n t er est r at es, so m e b an k s m ay st i l l n eed t o assess al l p r o du c t s t h at ar e i m p ac t ed b y n eg at i ve i n t er est r at e p ar am et er s an d t est t h ei r
val u at i o n m o del s f r o m b o t h a m et h o do l o g y an d i m p l em en t at i o n p er sp ec t i ve t o p r o vi de t h at t h ese m o del s c an f u n c t i o n p r o p er l y u n der
n eg at i ve r at e sc en ar i o s.
• Credit loss models.Thesemodelsmaybeimpactedtoalesserextentbecausethemajorityofcreditmodelstypicallydonotuseinterestrates
asamaterialdirectinput,relyinginsteadonHousePriceIndex(HPI),unemployment,GDPandsoon.
W h a t is n e x t ?
U p c om ing da tes:
• March 1, 2 016: g l o b al m ar k et sh o c k f ac t o r s du e ( w i l l l i k el y b e r el eased ear l i er )
• A pril 5, 2 016:2016capitalplanandFRY-14Asubmissionsdue
• E arly J une: F R B t o p r o vi de B H C s w i t h an o p p o r t u n i t y f o r a o n e-t i m e r edu c t i o n o f p l an n ed c ap i t al di st r i b u t i o n s b ased o n i n i t i al p o st -st r ess
results,whichmayincludereductioninalltypesofcapitaldistributions,notjustcommonstockdistributions
• J une 30, 2 016: c o m m u n i c at i o n deadl i n e f o r dec i si o n s b y t h e F R B
4
• BHCstodisclosecompany-runstresstestresultswithin15daysofthereleaseoffinalFRBresults
| ©2016 Ernst & Young LLP. All Rights Reserved.
Comparison of select FRB variables (CCAR 2015 vs. 2016) — severely adverse
Table 1: Real GDP growth
Table 2: Unemployment
5.0
15.0
Real GDP Growth (15 V 16)
10.0
0.0
-5.0
2015 sev. adv.
2015 sev. adv.
2016 sev. adv.
2016 sev. adv.
-10.0
Table 3: CPI
6.0
Unemployment (15 V 16)
5.0
2015 sev. adv.
2016 sev. adv.
0.0
Table 4: 3-Month Treasury yield
0.2
CPI (15 V 16)
3 Month Treasury Yield (15 V 16)
0.0
4.0
-0.2
2.0
2015 sev. adv.
-0.4
0.0
2015 sev. adv.
-0.6
Table 5: BBB corporate yield
7.0
2016 sev. adv.
2016 sev. adv.
Table 6: Fixed-rate 30-year mortgage
6.0
BBB Corporate Yield (15 V 16)
6.0
Fixed-rate 30-year mortgage (15 V 16)
4.0
5.0
2.0
4.0
2015 sev. adv.
2015 sev. adv.
2016 sev. adv.
3.0
Table 7: House Price Index
Table 8: VIX
190
100
HPI (15 V 16)
140
90
2016 sev. adv.
0.0
50
2015 sev. adv.
VIX over Forecast Horizon (15 V 16)
2015 sev. adv.
2016 sev. adv.
2016 sev. adv.
0
CCAR 2016 — EY Regulatory Alert |
5
T a b le 9 : C o m p a r is o n o f s e le c t F R B v a r ia b le s (C C A R 2 0 1 5 v s . 2 0 1 6 ) – s e v e r e ly a d v e r s e s c e n a r io
C C A R 2015
Macroeconomicfactor
3Q’14
jump-off
7
Δfrom3Q’14
to tro u g h
4Q’16
en di n g
val u e
4Q’15
jump-off
9Q
tro u g h
7
1Q’18
en di n g
val u e
Δfrom
4Q’15to
tro u g h
C C A R
2016
tro u g h
vs. C C A R
2015
tro u g h
R el at i ve
S ever i t y
Indicator8
2016 vs.
2015
RealGDPgrowth(%)
3.1
-6.1
-9.2
3.0
1.9
-7.5
-9.4
3.0
-1.4
▲
Unemploymentrate(%)
6.1
10.1
4.0
9.9
5.0
10.0
5.0
9.8
-0.1
▲
CPIinflationrate(%)
1.1
1.1
-
1.9
0.2
0.2
-
1.6
-0.9
▼
3-monthTreasuryyield(%)
0.0
0.1
0.1
0.1
0.1
-0.5
-0.6
-0.5
-0.6
▲
10-yearTreasuryyield(%)
2.5
0.9
-1.6
1.9
2.2
0.2
-2.0
1.2
-0.7
▲
BBBcorporateyield(%)
4.2
6.3
2.1
5.5
4.6
6.4
1.8
5.3
0.1
▼
Fixed-rate30-yearmortgage(%)
4.1
4.2
0.1
4.7
3.9
3.2
-0.7
4.1
-1.0
▲
PrimeRate(%)
3.3
3.2
-0.1
3.2
3.3
2.6
-0.7
2.6
-0.6
▲
20,459 8 , 606.3
-11, 8 52.5
11, 521
21, 101
10,395.5 -10,705.4
16, 18 0
1,789
▼
DowJonesTotalStockMarketIndex
HousePriceIndex
172.1
128.4
-43.7
128.4
18 3.1
138 .5
-44.6
138 .5
10.1
▼
CREPriceIndex
236.0
154.4
-8 1.6
154.6
273.4
190.1
-8 3.3
190.1
35.7
▼
17.0
79.0
62.0
21.6
24.4
73.3
48.9
22.8
-5.7
▼
MarketVolatilityIndex
T r o u g h i s an i n di c at o r o f sever i t y an d as a r esu l t val u es f o r u n em p l o y m en t , B B B
corporateyieldandVIXrepresentthepeakvalueoverthenineprojectionquarters.
ActualscenarioseverityisbasedoneachBHC’sspecificexposureandtherelative
assessm en t i s a g en er al i n di c at o r o f ex p ec t ed sever i t y ac r o ss B H C s.
7
8
9Q
tro u g h
C C A R 2016
6
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Preston Thompson
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+1 617 585 3485
[email protected]
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ser vi c es t o o u r c l i en t s.
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