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How The Federal Reserve Assesses Firms' Capital Plan Submissions, Part 2 – Glass & Goldberg | Financing, Property & Bankruptcy Law
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How The Federal Reserve Assesses Firms’ Capital Plan Submissions, Part 2

Firms submit capital plans to the Federal Reserve each year in April. These capital plans include detailed descriptions of the firms’ capital planning practices. These include descriptions of their policies governing capital actions and their internal procedures for assessing capital adequacy. Federal Reserve experts expend three months conducting an analysis of these policies and processes. Information gathered by related supervisory work conducted through the year also contributes to the analyses.

Two groups of supervisors conduct an initial assessment of each firm’s capital plan submission. The first group consists of dedicated supervisory teams (DSTs), which are composed of Federal Reserve staff that focus on a single firm. The second group consists of horizontal evaluation teams (HETs) which are composed of Federal Reserve staff focus on the examination of practices across multiple firms rather than a specific financial institution.

After the initial assessment, the DSTs and HETs rate each firm’s practices in each of six areas:

  1. governance
  2. risk management
  3. internal controls
  4. capital policies
  5. scenario design
  6. projection methodologies

The ratings indicate the extent to which a firm’s capital planning practices meet previously communicated supervisory expectations. These ratings are further utilized to determine the nature and severity of supervisory feedback. Then, a committee of senior staff members reviews these initial supervisory assessments seeking to confirm that:

  • evaluations are aligned with the supervisory expectations communicated to the industry;
  • evaluations are well supported and are consistently applied across firms accounting for their size and complexity; and
  • assessments, as reflected in the ratings, are appropriately calibrated to the materiality of the supervisory concern.

This committee also ranks firms based on the ratings for each assessment area, considering each firm’s individual risk profile. These rankings assist the Fed in distinguishing the relative strength of each firm’s capital planning practices and facilitating the consistent application of supervisory guidance across firms.

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