Fed Requires Annual Capital Plans From Top-tier Bank Holding Companies | Practical Law

Fed Requires Annual Capital Plans From Top-tier Bank Holding Companies | Practical Law

On November 22, 2011, the Federal Reserve Board (FRB) issued a final rule requiring US bank holding companies (BHCs) with assets of at least $50 billion to submit annual capital plans for review. In addition, the FRB announced that it has launched its 2012 review of covered BHCs.

Fed Requires Annual Capital Plans From Top-tier Bank Holding Companies

Practical Law Legal Update 0-513-9431 (Approx. 3 pages)

Fed Requires Annual Capital Plans From Top-tier Bank Holding Companies

by PLC Finance
Published on 28 Nov 2011 • USA (National/Federal)
On November 22, 2011, the Federal Reserve Board (FRB) issued a final rule requiring US bank holding companies (BHCs) with assets of at least $50 billion to submit annual capital plans for review. In addition, the FRB announced that it has launched its 2012 review of covered BHCs.
On November 22, 2011, the Federal Reserve Board (FRB) issued a final rule, requiring US bank holding companies (BHCs) with at least $50 billion in assets to submit annual capital plans for review. The rule requires covered BHCs to:
  • Annually develop and submit a capital plan to the Federal Reserve.
  • Request prior approval from the Federal Reserve under certain circumstances before making a capital distribution.
The purpose of the annual capital plans is to ensure that covered BHCs:
  • Maintain sufficient capital to manage risks effectively.
  • Can continue lending to businesses and consumers in times of economic and financial stress.
  • Can meet new regulatory capital standards as they are implemented.
In addition, a FRB press release announced the launch of its 2012 review of covered BHCs. The review includes the Comprehensive Capital Analysis and Review (CCAR), which requires the covered BHCs to carry out a supervisory stress test to support an analysis of the adequacy of their:
  • Internal capital planning processes.
  • Capital adequacy.
  • Proposed capital distributions (such as stock repurchases and dividend payments).
While all covered BHCs must participate in these stress tests, the Federal Reserve will simultaneously conduct supervisory stress tests on the 19 largest BHCs that participated in the CCAR in 2011.
In its review of the capital plans and stress test evaluations of covered BHCs, the Federal Reserve will consider several factors, including:
  • The comprehensiveness of the plan.
  • The BHC's capital policies.
  • The reasonableness of the BHC's assumptions and analysis supporting its assessment.
  • The BHC's ability to maintain capital under expected and stressful conditions above certain levels.
If the Federal Reserve determines that a covered BHC has an incomplete or insufficient capital planning process or has projected capital ratios that appear inappropriate given its risk profile, the covered BHC may be:
  • Required to devote additional resources to developing and implementing more appropriate processes.
  • Restricted from making some or all of its intended capital distributions.
  • Required to take other actions to improve its capital adequacy.
For more information on stress tests and other authorities of the FRB mandated under the Dodd-Frank act, see Practice Note, Summary of the Dodd-Frank Act: Regulation of Systemically Significant Financial Institutions.