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Fitch: US CCAR Changes Show Fed's Focus on Large, Complex Banks
February 8, 2017 / 3:10 PM / 10 months ago

Fitch: US CCAR Changes Show Fed's Focus on Large, Complex Banks

(The following statement was released by the rating agency) NEW YORK/CHICAGO, February 08 (Fitch) Changes to the US Comprehensive Capital Analysis and Review (CCAR) process make it less onerous for large and noncomplex firms, highlighting the Federal Reserve's (the Fed) focus on large complex banks, says Fitch Ratings. The rules governing large banks with assets greater than $250 billion continue to diverge from other firms covered by the CCAR, such as regional banks. This change removes 21 banks with assets between $50 billion and $250 billion that aren't classified as globally systemically important banks from the qualitative assessment of the CCAR process, although they still have to participate in the quantitative stress test component. According to the Fed, this rule change will lessen the "significant burden" on the large and noncomplex banks. In addition, banks with foreign exposure greater than $10 billion will also benefit from the qualitative CCAR exemption. The final rule also decreases the amount of additional capital a bank can distribute. Previously, an institution could distribute up to an additional 1% of its Tier 1 capital, beyond what was originally included in the capital plan. However, under the final rule, that amount is reduced to 0.25% of Tier 1 capital. Fitch believes it is unlikely to result in a meaningful drop in capital planning rigor at these firms. The Fed will still assess the strength of each firm's processes through a targeted horizontal capital review beginning in 3Q17. This reduces the reputational risk of a qualitative failure, potentially making these banks more confident with capital distribution requests. Separate from the rule changes announced on Jan. 30, the Fed subsequently released its 2017 stress test instructions on Feb. 3. A material change to this year's stress test includes significant enhancements to the Fed's models, which will be phased in over two years to smooth the effect on post-stress capital ratios. For the 2017 cycle, the model estimating certain components of pre-provision net revenue (PPNR) will reflect the average of the model used in the 2016 cycle and the updated model. For 2018, the estimates will only reflect the new model. Operational risk events and expenses related to mortgage repurchases are two significant components of PPNR. Changes include incorporating the mortgage repurchase model into the operational risk model and in estimating operational risk losses for each firm. Firms with lower historical operational risk losses are likely to be subject to higher losses. Instead of calculating loss severity separately on a firm-specific basis, total losses will be forecast at the industry level and then distributed based on a firm's asset size. When these model changes go into full effect during next year's CCAR cycle, some banks may perform worse than in prior years. Changes to the commercial real estate (CRE) loan loss model could have a material impact on some banks' results. The Fed expects the changes to lead to slightly higher aggregate loan losses under the severely adverse scenario, which have consistently increased since the stress test process started. Firms with greater CRE exposure are likely to be more affected, while trust and processing banks will probably see limited impact because of their smaller lending profiles. Banks participating in this stress testing cycle are preparing their submissions for the April 5 deadline. The 2017 severely adverse scenario for the Dodd-Frank Act stress tests appears tougher than 2016 in terms of shocks to domestic GDP, unemployment and CRE, although positive short-term rates (unlike last cycle) partly offset these. The results will be announced by June 30. Contact: Julie Solar Senior Director, Financial Institutions +1 312 368-5472 Fitch Ratings 70 West Madison Chicago, IL Christopher Wolfe Managing Director +1 212 908-0771 33 Whitehall Street New York, NY Cynthia Chan Head of Fitch Wire Credit Policy +44 203 530 1655 Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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