The Wall Street Journal and NPR today highlighted Karen Petrou’s views on the outcome of this year’s CCAR for the largest U.S. banks. Karen’s comments on CCAR’s qualitative criteria are based on our practice. In 2013, we laid out a primer on key qualitative issues, focusing in particular on the strategic-planning issues specifically required of boards and senior management.
Although some have suggested CCAR is becoming a “non-event,” FedFin advises that the next round will in fact be considerably more stringent from both a qualitative and quantitative perspective. In particular, we expect greater direct linkage between solvency and liquidity, building not only on one recent OFR recommendation gaining considerable traction with global regulators, but also on the FRB’s sweeping new liquidity reports for the largest U.S. banks. We also expect the FRB to use its qualitative standards to take a still firmer stand on intra-group and correlated risks and to build in the G-SIB surcharge and TLAC standards even though these will become binding only over time.
Given that CCAR’s qualitative results are the binding capital constraints for the largest banks doing business here, these changes raise significant strategic challenges, especially for Foreign Banking Organizations contemplating U.S. M&A or any other expansion that raises their CCAR profile. CCAR has to date had only limited impact on non-bank broker-dealers and insurance companies subject to FRB regulation, but we expect 2015 also to be a year in which they are increasingly brought under CCAR in concert with clearer regulatory-capital standards. Given the critical importance of capital distributions, this year’s CCAR results are thus very much an event not only for the banks subject to it, but also those soon to be subject to the heightened stress-test framework.