On March 6, 2019, the Federal Reserve issued a final rule to exempt from the qualitative component of the Comprehensive Capital Analysis and Review (“CCAR”) exercise large firms that have participated in CCAR for four consecutive years and have passed the final year’s qualitative component without objection.  The final rule serves to provide an immediate exemption for all domestic bank holding companies currently subject to CCAR, and to phase out the qualitative objection for U.S. intermediate holding companies of foreign banks (“IHCs”).

CCAR’s qualitative assessment is intended to evaluate whether a firm has appropriate processes in place to measure, monitor, and manage its risks in the context of capital planning.  A firm that receives an objection to its capital plan on qualitative grounds can be precluded from making capital distributions.

In January 2017, the Federal Reserve amended its capital plan rule to exempt “large and noncomplex” firms from the qualitative component of CCAR.  A “large and noncomplex” firm is defined as a firm (1) with average total consolidated assets of $50 billion or more but less than $250 billion; (2) with average total nonbank assets of less than $75 billion; and (3) that is not a U.S. global systemically important bank holding company (“G-SIB”).  However, at that time the Federal Reserve retained the qualitative objection for firms in the Federal Reserve’s Large Institution Supervision Coordination Committee (“LISCC”) portfolio and for “large and complex” firms (i.e., those that are U.S. G-SIBs, or that have $250 billion or more of total consolidated assets or $75 billion or more of total nonbank assets).

While the Federal Reserve did not previously issue a proposed rule to exempt LISCC firms or large and complex firms from the qualitative objection, the agency sought comment on the issue in an April 2018 proposal to adopt the Stress Capital Buffer.  The Federal Reserve has concluded that the March 2019 final rule is not subject to the 30-day delayed effective date that the Administrative Procedure Act ordinarily requires because the rule would relieve a regulatory restriction.  As a result, the final rule is effective immediately, and will provide relief to domestic bank holding companies during the 2019 CCAR cycle.

Firms that are subject to CCAR but have not yet had their capital plans evaluated on qualitative grounds for four consecutive years – a group that currently consists only of IHCs – will remain subject to the qualitative objection until the completion of their fourth cycle without receiving a qualitative objection.  After December 31, 2020, the Federal Reserve will cease objecting to capital plans on qualitative grounds entirely, other than for firms receiving a qualitative objection in 2020.

Firms exempt from the qualitative objection will be still be subject to regular supervisory assessments that examine their capital planning processes (and potentially enforcement action if warranted), as well as CCAR’s quantitative assessment of their ability to satisfy capital requirements under stress.  As we previously summarized in depth, the Federal Reserve’s April 2018 proposal to implement the Stress Capital Buffer would remove the quantitative objection from CCAR.  Additionally, Vice Chair for Supervision Randal Quarles stated in November 2018 that the Federal Reserve is considering making changes that, if implemented, would effectively eliminate the pass/fail aspect of CCAR and capital planning.