Fed Asks Morgan Stanley to Resubmit Capital Plan

The Federal Reserve did not object to the capital plans of 30 out of 33 bank holding companies tested as part of the Fed’s Comprehensive Capital Analysis and Review (CCAR), according to an announcement from the Fed on Wednesday afternoon.

The Fed objected to the capital plans of two out of the 33 companies tested, Deutsche Bank and Santander Holdings USA. While the Fed did not object to Morgan Stanley’s capital plan, the central bank is requiring the firm to submit a new plan by December 29, 2016, in order to address weaknesses found in its capital planning process.

The CCAR evaluates the largest U.S.-based bank holding companies’ capital planning processes and capital adequacy. The tests examine the firms’ planned capital actions, such as dividend payments and share buybacks and issuances. The purpose of the CCAR is to test the ability of banking organizations to lend during times of severe economic stress; companies with strong capital levels have the ability to absorb losses brought on by economic shock.

“Over the six years in which CCAR has been in place, the participating firms have strengthened their capital positions and improved their risk-management capacities,” Fed Governor Daniel K. Tarullo said. “Continued progress in both areas will further enhance the resiliency of the nation's largest banks.”

The Fed considers both quantitative and qualitative factors when examining a firm’s capital plan for the CCAR. Quantitative factors include projected capital ratios under hypothetical scenarios of severe economic stress, while qualitative factors may include the strength of the firm’s capital planning process. The plans of Deutsche and Santander were rejected by the Fed based on qualitative concerns; no firms’ plans were rejected based on quantitative concerns.

According to the Fed, the weaknesses found in Morgan Stanley’s capital plan “warrant further near-term attention but do not undermine the quantitative results of the stress tests for the firm. They include shortcomings in the firm’s scenario design practices, which do not adequately reflect risks and vulnerabilities specific to the firm, weaknesses in some aspects of the firm’s modeling practices, and weaknesses in governance and controls around both scenario design and modeling practices.”

“Continued progress in both areas will further enhance the resiliency of the nation's largest banks.”

Fed Governor Daniel Tarullo

Morgan Stanley Chairman and CEO James Gorman said that the investment banking firm is “committed to addressing the Fed’s concerns about our capital planning process and fully expect to meet their requirements within the established timeframe.”

The Fed did not object to the capital plans of (alphabetically): Ally Financial, Inc.; American Express Company; BancWest Corporation; Bank of America Corporation; The Bank of New York Mellon Corporation; BB&T Corporation; BBVA Compass Bancshares, Inc.; BMO Financial Corp.; Capital One Financial Corporation; Citigroup, Inc.; Citizens Financial Group; Comerica Incorporated; Discover Financial Services; Fifth Third Bancorp; Goldman Sachs Group, Inc.; HSBC North America Holdings, Inc.; Huntington Bancshares, Inc.; JP Morgan Chase & Co.; Keycorp; M&T Bank Corporation; MUFG Americas Holdings Corporation; Northern Trust Corp.; The PNC Financial Services Group, Inc.; Regions Financial Corporation; State Street Corporation; SunTrust Banks, Inc.; TD Group US Holdings LLC; U.S. Bancorp; Wells Fargo & Company; and Zions Bancorporation.

According to the Fed, M&T Bank Corporation met minimum capital requirements on a post-stress basis after submitting an adjusted capital action.

Results of the Dodd-Frank Stress Tests (DFAST) released last week indicated that firms have substantially increased their capital since the first round of stress tests conducted by the Fed in 2009. The common equity capital for the 33 bank holding companies combined has increased by $700 billion up to a total of about $1.2 trillion during that period, according to the Fed.

Click here to view the complete results of the CCAR.