Each year, the largest BHCs in the U.S. are required to undergo a stringent stress-test, generally known as CCAR, set by the FRB on which the other banking agencies and FHFA also model their capital-adequacy reviews. Although line-by-line capital requirements under the Basel III rules are vital strategic drivers, CCAR is the binding constraint for each big bank. If a bank falls short on either quantitative or qualitative grounds, the FRB bars capital distributions and investors get very, very cranky. CCAR works by stress scenarios, with the severely-adverse one determining capital-distribution capacity. For the 2016 round, the FRB has gotten even stricter than in past years, setting CCAR-stipulated standards so high that, in our view, the biggest BHCs are essentially financial utilities destined by the FRB to ensure that the banks keep the lending and trading lights on even if financial stability is falling in ruins about them.

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