2019 CCAR instructions are less bullish than hoped...

The Federal Reserve Bank's annual Comprehensive Capital Analysis and Review (CCAR) instructions were released yesterday (6 March 2019) and they closely resemble last year's instructions with little in the way of changes to the process that were hoped for by some bank bulls. Following the release of the Fed's CCAR stress scenarios for 2019 back in early February, some investors hoped for greater clarification of key model drivers, like the treatment of balance sheet growth and share buybacks under stressed scenarios, this year. Yet, while there were some notable differences in this year's instructions (described below), it appears that the more industry-friendly aspects will likely come through regulator interpretations rather than explicitly worded guidelines in 2019.

but, the outlook for increased payouts remains.

Despite only modest changes, there is no reason to alter positive expectations relative to the 2019 CCAR. The banks' capital plans are due to be submitted to the Fed on 5 April and the results should be released in late June. As was the case last year, the major US banks will likely announce their capital plans for the third quarter 2019 through the second quarter 2020 soon after the release of the Fed's results. Market expectations are for all major US banks to pass this year's test by demonstrating sufficient capital adequacy and capital planning processes. Most importantly, expectations remain intact for banks to have sufficient excess capital under the various stressed scenarios to generally payout in excess of 100% of current period net income in the form of dividends and share repurchases.

Qualitative risk removed for US banks.

There were four key differences worth noting in this year's instructions relative to 2018. First, US Banks will no longer be subject to a "qualitative objection" in this year's test, meaning that the risk of a negative surprise (or, "public shaming" of any individual US banks) has been removed. Second, large non-complex US banks (including those with assets between USD 100 billion and USD 250 billion) are exempted from CCAR's quantitative assessment in 2019; however, these banks will be required to submit capital plans in 2020. Third, certain international holding companies (IHCs) become subject to the global market shock and counterparty default scenario rather than the “simplified” global market shock and no counterparty default scenarios last year. Fourth, overall supporting documentation requirements have been reduced, thereby relieving some of the compliance burdens placed on large banks that are subject to the test.

Remain optimistic for regulatory reforms.

While the detailed instructions do not include an explicitly softer touch in this year's CCAR, it does leave open to interpretation certain aspects related to loss content and steady state capital levels which could be a positive for capital planning going forward. Also, US Banks will no longer be subject to a "qualitative objection" in this year's test, meaning that the risk of a negative surprise (or, "public shaming" of any individual US banks) has been removed. Although uncertainty remains with respect to longer-term "steady state" capital requirements, pending finalization of the stressed capital buffer (SCB) framework, and globally systemically important bank (G-SIB) recalibration, major US banks remain relatively conservatively positioned and would likely benefit from any clarifications ahead.

Author: Bradley Ball, Financials Analyst Americas, UBS Financial Services Inc. (UBS FS)

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