Capital Planning at Large Bank Holding Companies: Supervisory Expectations and Range of Current Practice: formula sheet

Key formulas

Capital plan rule

12 CFR 225.8 (Regulation Y): annual capital plan from large bank holding companies

This is the legal basis for CCAR. Know that it requires an annual submission to the Federal Reserve.

Planning horizon

At least 9 quarters, beginning with the fourth quarter of the calendar year before the submission year

Projections cover capital, losses, revenue and reserves over this period.

Pro forma capital ratio test

Projected capital ratio ≥ required minimum, after planned capital actions, under stress

The ratio is tested through the whole horizon, not only at the end.

Five themes of capital adequacy (study framework)

Risk identification and measurement; policies and procedures (capital goals, capital actions); capital adequacy assessment including stress testing; internal controls, independent review and audit; board and senior management oversight (governance)

This is a study framework, not the Fed's official list. Use it as a checklist to classify any practice or weakness in a question, and confirm wording against your GARP reading. Capital actions sit under policy. Governance is board and senior management oversight.

Capital plan contents

Capital policy + stress analysis + pro forma ratios + planned capital actions + process description

A missing component is a typical reason for a plan to be seen as deficient.

Post-stress capital ratio

Capital ratio = (Starting capital + Projected net income − Capital distributions − Other capital deductions) ÷ Risk-weighted assets

Under stress, net income falls or turns negative, and RWA may rise. Use the stressed values of each item.

Capital shortfall or buffer

Buffer = Post-stress capital ratio − Minimum (or internal target) ratio

A negative value signals a shortfall. Compare with both the regulatory minimum and the internal target.

Stress impact

Stress impact = Stressed outcome − Baseline outcome

Measures the incremental effect of the scenario, so baseline results are not mistaken for stress losses.

PPNR

PPNR = Net interest income + Non-interest income − Non-interest expense

Measured before provisions for loan losses. Stress usually cuts income and may raise expense.

Expected loss (component approach)

EL = PD × LGD × EAD

Under stress, PD and LGD rise and EAD can rise as credit lines are drawn.

Loss-rate approach

Projected loss = Stressed loss rate × Exposure balance

Applied by segment, often with loss rates driven by macro variables.

Pre-tax income

Pre-tax income = PPNR − Provisions − Other losses (trading, securities, operational)

Tax effects then give net income, which feeds the capital ratio.

Capital ratio path

Capital ratio = Regulatory capital ÷ Risk-weighted assets

Capital changes by net income less capital actions. RWA changes with stressed balance sheet and risk weights.

Capital ratio

Capital ratio = Regulatory capital ÷ Risk-weighted assets

Use the matching capital measure in the numerator (CET1, Tier 1 or total capital) for each ratio.

Ending capital roll-forward

Ending capital = Opening capital + Net income − Dividends − Buybacks ± Other adjustments

Net income in stress includes projected losses and provisions, so it can be negative.

Leverage ratio

Tier 1 leverage ratio = Tier 1 capital ÷ Average total assets (or leverage exposure under the relevant rule)

Check which denominator the question uses. It does not use risk weights.

Capital buffer over goal

Excess (shortfall) = Projected ratio − Capital goal or trigger

Positive means room to distribute. Negative means contingency actions are needed.

Capital needed to meet a target

Capital needed = Target ratio × RWA − Projected capital

A positive result is the amount to preserve or raise, for example by cutting distributions.

Quick revision

• Capital planning is the bank's process for holding enough capital to keep lending and absorb losses under stress.
• The process runs from risk identification to scenarios, estimates, capital impact and capital policy.
• Supervisors expect a forward-looking assessment, not just current regulatory ratios.
• Scenarios should reflect the bank's own particular vulnerabilities, not only supervisory scenarios.
• Governance means board and senior management oversight, clear ownership and independent review.
• Internal controls should cover models, data, assumptions and management judgment.
• Estimates of losses, revenues and expenses should be consistent with the scenario.
• Stress results must feed into capital actions such as dividends and buybacks.
• A capital policy should set targets and triggers for action when capital falls short.
• Weak practice includes poor data, undocumented assumptions and results disconnected from decisions.
• Practice differs across banks, so strong answers describe a range, not one method.

Common mistakes

• Treating CCAR as only a quantitative stress test. Fix: Remember the Fed's expectations also cover the process: governance, controls and risk identification. In historical CCAR a weak process could lead to a qualitative objection even with adequate ratios. That objection was phased out: removed for large and noncomplex firms in 2019, and eliminated for the largest firms with the stress capital buffer rule effective 2020. The process expectations remain as supervisory guidance.
• Confusing CCAR with DFAST. Fix: CCAR evaluates the firm's own planned capital actions as part of its capital plan. DFAST is the Dodd-Frank supervisory stress test, which assumes standardized capital actions. They are not simply parallel processes today: the stress capital buffer now links stress test results to capital requirements.
• Saying risk identification covers only risks the bank already models. Fix: Remember that material risks include hard-to-quantify ones such as strategic, reputational and model risk. They need qualitative assessment or a conservative buffer.
• Assigning model building to the board. Fix: The board approves, questions and understands assumptions and limitations. Management and staff build and run the process.
• Treating supervisory scenarios as enough for capital planning Fix: Remember supervisors expect bank-specific scenarios too, reflecting the bank's own risk profile.
• Confusing baseline with stress Fix: The baseline is the expected path; the stress path is adverse. Stress impact is the difference.
• Subtracting provisions when calculating PPNR. Fix: PPNR is before provisions. Subtract provisions and other losses afterwards to get pre-tax income.
• Assuming credit losses alone drive capital depletion. Fix: Remember PPNR, trading and counterparty losses, securities impairments and RWA changes also move the capital ratio.
• Using start-of-period or unstressed RWA in the denominator. Fix: Always check whether the question gives stressed RWA and use it.
• Forgetting to subtract planned dividends and buybacks from capital. Fix: Use the full roll-forward: opening + net income − distributions ± adjustments.

Exam tips

• Know the five themes and be able to sort a practice into one quickly. Treat the list as a study framework and check the wording in your GARP reading.
• Remember that CCAR has a quantitative side (ratios under stress) and a process side (governance, controls, risk identification). The qualitative objection was phased out: removed for large and noncomplex firms in 2019 and eliminated for the largest firms with the stress capital buffer rule effective 2020. The stress capital buffer now ties stress results to capital requirements, and the process expectations remain as supervisory guidance.
• Expect questions that give a weakness and ask for the fix. The fix is usually firm-specific scenarios, independent review or board involvement.
• Do not mix up CCAR with DFAST. Look for the firm's own planned capital actions as the CCAR marker; DFAST assumes standardized capital actions.
• Use the rule details: annual submission, at least nine quarters, capital above minimums after capital actions.
• Match each action to the right role: board approves and challenges, management runs, independent functions validate and audit.
• Watch for independence clues. A developer reviewing their own model is almost always the flaw.
• Questions often ask which risk was missed. Look for concentration, liquidity, operational or model risk absent from the scenarios.