Both the Dodd-Frank Act supervisory stress tests and the Comprehensive Capital Analysis and Review (CCAR) supervisory post-stress capital analysis utilize similar projections of total assets, risk-weighted assets, and net income. However, both use different capital action inferences to project post-stress capital levels and ratios. How are they different?
The Federal Reserve incorporates a standardized set of capital action assumptions delineated by Dodd-Frank’s stress test rules to project post-stress capital ratios. To wit:
- Common stock dividend payments are assumed to continue at the same level as the year before.
- Scheduled dividend, interest, or principal payments on any other capital instrument eligible for inclusion in the numerator of a regulatory capital ratio are assumed to be paid.
- Repurchases of capital instruments are assumed to be zero.
Except for common stock issuance associated with employee compensation expense or related to a planned merger or acquisition, these assumptions do not include issuances of new common stock or preferred stock. Any projection of post-stress capital ratios includes capital actions and other changes related to business plan changes in a specific scenario.
In comparison, the Federal Reserve uses a company’s planned capital actions under its Bank Holding Company (BHC) baseline scenario. This includes both capital issuances and capital distributions as proposed and assimilates interconnected business plan changes for the CCAR post-stress capital analysis.
Because of these dissimilarities, post-stress capital ratios projected by one of these analyses may substantially differ from the other. As an example, if a firm increases its dividend or repurchases of common equity in its planned capital actions, post-stress capital ratios projected by the CCAR capital analysis could be lower than those projected for the Dodd-Frank tests.
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