12th March 2019

Fed Board to limit use of "qualitative objection" in its CCAR exercise

The Federal Reserve Board is to limit the use of the "qualitative objection" in its Comprehensive Capital Analysis and Review (CCAR) exercise, effective for the 2019 cycle. The changes eliminate the qualitative objection for most firms due to the improvements in capital planning made by the largest firms.

For the largest and most complex firms, CCAR includes both a quantitative evaluation of a firm's capital adequacy under stress and a qualitative evaluation of its abilities to determine its capital needs on a forward-looking basis. As applicable, a firm must pass both the quantitative and qualitative evaluation or the Board may object and restrict the firm's shareholder distributions.

Firms that are newer to the CCAR exercise and as a result may have capital planning capabilities that are less established will remain subject to a possible objection on qualitative grounds. Specifically, a firm must participate in four CCAR exercises and successfully pass the qualitative evaluation in the fourth year to no longer be subject to a potential qualitative objection. If a firm does not pass in its fourth year, it will continue to be subject to a possible qualitative objection until it passes. For firms still subject to the qualitative objection, their fourth year will generally be the 2020 CCAR cycle.

While the qualitative objection will no longer apply to certain firms, all firms will continue to be subject to a rigorous evaluation of their capital planning processes as part of CCAR. Firms with weak practices may be subject to a deficient supervisory rating, and potentially an enforcement action, for failing to meet supervisory expectations. In addition, all firms remain subject to a potential objection on quantitative grounds.

The Board has also released the instructions for this year's CCAR exercise. The instructions confirm that 18 firms will be subject to this year's CCAR exercise, with five of those firms subject to a possible qualitative objection.

Eleven firms with large trading operations will be required to factor in a global market shock as part of their scenarios. Thirteen firms with substantial trading or processing operations will also be required to incorporate a counterparty default scenario.