美聯(lián)儲(chǔ)-貸款人審查下的企業(yè)并購（英）

FinanceandEconomicsDiscussionSeries

FederalReserveBoard,Washington,D.C.

ISSN1936-2854(Print)

ISSN2767-3898(Online)

CorporateMergersandAcquisitionsUnderLenderScrutiny

BuhuiQIu,TengWang

2024-025

Pleasecitethispaperas:

QIu,Buhui,andTengWang(2024).“CorporateMergersandAcquisitionsUnderLenderScrutiny,”FinanceandEconomicsDiscussionSeries2024-025.Washington:BoardofGov-ernorsoftheFederalReserveSystem,

/10.17016/FEDS.2024.025

.

NOTE:StafworkingpapersintheFinanceandEconomicsDiscussionSeries(FEDS)arepreliminarymaterialscirculatedtostimulatediscussionandcriticalcomment.TheanalysisandconclusionssetfortharethoseoftheauthorsanddonotindicateconcurrencebyothermembersoftheresearchstafortheBoardofGovernors.ReferencesinpublicationstotheFinanceandEconomicsDiscussionSeries(otherthanacknowledgement)shouldbeclearedwiththeauthor(s)toprotectthetentativecharacterofthesepapers.

1

CorporateMergersandAcquisitionsUnderLenderScrutiny*

BuhuiQiu?

UniversityofSydney

TengWang?§

FederalReserveBoard

January2024

Abstract

Thispaperexaminescorporatemergersandacquisitions(M&A)outcomesunderlenderscrutiny.UsingtheuniqueshocksofU.S.supervisorystresstesting,wefindthatfirmsunderincreasedlenderscrutinyaftertheirrelationshipbanksfailstresstestsengageinfewerbuthigher-qualityM&Adeals.EvidencefromcomprehensivesupervisorydatarevealsimprovedcreditqualityfornewlyoriginatedM&A-relatedloansunderenhancedlenderscrutiny.ThisimprovementisfurtherevidentinpositivestockreturnreactionstoM&Adealsfinancedbyloanssubjecttoenhancedlenderscrutiny.Ascompaniesengageinfewerbuthigher-qualitydeals,theyalsoexperiencehigherreturnsonassets.OurfindingshighlighttheimportanceoflenderscrutinyincorporateM&Aactivities.

JELClassification:G21;G34.

Keywords:MergersandAcquisitions;LenderScrutiny;StressTests.

*TheviewsexpressedinthispaperaresolelythoseoftheauthorsandshouldnotbeinterpretedasreflectingtheviewsoftheFederalReserveBoardortheBankforInternationalSettlements.WethankXiaohuDeng,BoraDurdu,IsilErel(discussant),CrociEttore(discussant),KathleenJohnson,TümerKapan(discussant),DoowonLee,JaneLuo,DorianaRuffino,ThomasTo,Kangzhen(Ken)Xie(discussant),AlfredYawson,StevenOngena,conferenceparticipantsatMidwestFinanceAssociationAnnualMeeting,theFederalReserveStressTestingResearchConference,theParisDecemberFinanceMeeting,andtheFinancialManagementAssociationAnnualMeeting,andseminarparticipantsattheFederalReserveBoard,ColoradoStateUniversity,theFinancialServicesAgencyofJapan,theUniversityofAdelaide,theUniversityofNewcastle,theUniversityofSydneyandtheUniversityofTasmaniaforhelpfulcommentsandsuggestionsonthepaper.Allerrorsareourown.

?TheUniversityofSydneyBusinessSchool,Address:TheCodringtonBuilding,TheUniversityofSydney,NSW2006,Australia.Email:

buhui.qiu@.au.

?BoardofGovernorsoftheFederalReserveSystem.Address:20thSt.andConstitutionAve.N.W.,Washington,DC20551.USA.Email:

teng.wang@.

§TheBankforInternationalSettlements,Centralbahnplatz2,CH4002Basel,Switzerland.

2

"TheFederalReserveisstronglycommittedtostresstestingasacornerstoneofourbanksupervisoryandfinancialstabilitymissions.Stresstestingisperhapsthemostsuccessful

supervisoryinnovationofthepost-crisisera."

—JeromeHPowell

1Introduction

Despitetrillionsofdollarsspentoncorporatemergersandacquisitions(M&A)eachyear,theevidenceintheliteratureclearlyindicatesthatthesetransactionsdonotalwaysbenefitacquiringfirms’shareholders.Theliteraturesuggeststhatexecutivesoftenengageinagency-motivatedacquisitionstobenefitthemselves(e.g.,

GrinsteinandHribar

2004;

HarfordandLi

2007;

IshiiandXuan

2014

)attheexpenseofshareholders.M&Acanevenleadtosignificantshareholderwealthdestruction(e.g.,

Moelleretal.

2004;

Moeller

etal.

2005).Banks,amajorsourceoffundingforcorporateM&Aactivity,1

areknownfortheirspecialabilityinscrutinizingloanapplicationsandinvestmentprojectsofhigherquality(e.g.,

StiglitzandWeiss

1981;

Bester

1985;

Diamond

1991;

BoydandPrescott

1986;

Marquez

2002).CanenhancedlenderscrutinyaffectcorporateM&Aactivityandthe

shareholdervalueofacquiringfirms?ThispaperexaminescorporateM&Aoutcomes

underenhancedlenderscrutinyfollowingtheuniqueshocksofbankstresstestfailures.

TestingthedirecteffectsoflenderscrutinyoncorporateM&Aactivitiespresentsseveralidentificationchallenges.Oneissueisthatthestrengthoflenderscrutinycannotbedirectlyobservedormeasured.Additionally,evenifitcouldbeobserved,thelevelofscrutinywouldlikelybecorrelatedwithvariouscharacteristicsofcorporateborrowers,makingitdifficulttoestablishcausality.Inthisstudy,weconsiderbanksfailingtheFederalReserve’sforward-lookingstresstestsassignificanteventsthatdirectlyincrease

theloanscrutinizingincentivesofthefailedbanks.Ourfindingsindicateasignificant

1FinancingcorporateM&Aofteninvolvesmega-syndicatedloans.Forexample,whenfinancingitsacquisitionofAetnain2018,CVSenteredintoa$5billionunsecuredtermloanagreementwithamaturityofthreetofiveyears.

3

effectofenhancedlenderscrutinyfromstresstestfailedbanksoncorporateborrowers’

M&Aactivities.

Indeed,recentstudiessuggestthatcapitalregulationscanincreasebanks’monitoringincentivesandthustheefficiencyofbanks’activities(e.g.

Begenau

2020).FederalReserve’s

SupervisoryStressTests,asthecornerstoneintheU.S.post-GlobalFinancialCrisiscapitalregulatoryframework,areidealfortacklingtheaforementionedidentificationchallengesforthefollowingreasons.First,bankstakefailingstresstestsseriously.Supervisorystresstestsareinstalledtoassesswhetherbankshaveenoughcapitaltosurviveadverseeconomicshocks.Failingthestresstestcausesseverereputationaldamageandleadstoimmediateconstraintsonabank’scapitaldistributionplan,includingtheprohibitionofdividenddistributionandnetsharerepurchase.

2

ThesignificanceoftheseeventsiswellstatedbyMichaelCorbat,formerCEOofCitigroup,whoviewedpassingthefollowingyear’sstresstestasMissionNo.1.AfterCitigroupfailedthestresstestin2014,Mr.Corbat

emphasizedthat“Ifwedon’tgetthisright,wedon’tdeservetostayinbusiness.”

3

Second,theforward-lookingnatureofthesupervisorystresstestsmatchesthatofbanks’scrutinyactivity.Oneoftheuniquefeaturesofthesupervisorystresstestsisthatitistheonlyforward-lookingcapitalregulatorytoolthatprojectstherisksofloansonbanks’portfolios.Indeed,initsmethodologydisclosuredocument,theFederalReservementionedthatit“projects13quartersoflossesonloansintheaccrualloanportfoliousing...theexpected-lossframework”.

4

Theforward-lookingnatureoftheSupervisoryStressTestsalignswellwiththenatureofbanks’loanscreeningandscrutinizingactivityontheirloanportfolios.Bankstakestresstestsseriouslyandusetheresultsasawake-upcalltoimprovetheirduediligenceinassessingtheirclients’newinvestmentprojects,

especiallyriskyM&Adeals.

2Anumberofbanksfailedthestresstestsandwererequiredtoraisenewcapitaland/orchangetheirdistributionplans.Incontrast,banksthatpassedthestresstests,evenbyasmallmargin,werenotrequiredtodoso.

3See

/articles/citigroup-fights-to-recover-from-stress-test-failure-1403291332

.

4See

/publications/files/2021-april-supervisory-stress-test

-methodology.pdf.

4

Third,giventhesheersizeofM&A-relatedloansandthelevelofriskinessinvolved,havingtheseloansonbanks’balancesheetshassubstantialimplicationsonthestresstestresults.M&Aisthelargestandriskiesttypeofcorporateinvestment,anditisknownthatM&Aincreasestheacquiringfirms’defaultrisk(

FurfineandRosen

2011

).AccordingtotheFederalReserve’sstresstestmethodology,largerandriskierloansnotonlyaffectthecalculationofrisk-weightedassetsbutalsocontributetohigherprojectedlosses.ThisposesachallengeforbanksholdingriskyM&Aloansinpassingthestresstest.

5

Absenteffectivescrutiny,alargeandriskyM&A-relatedloanonthebalancesheetcouldevenposepipelinerisktothebankinthefutureroundsofstresstests(e.g.,

Brucheetal.

2020

).Therefore,whenabankfailsastresstest,thebankwillmostlikelypayextraattentiontoscrutinizethequalityofitsborrowers’newM&Adeals.Importantly,suchenhancedbankscrutinyduetostresstestfailureisexogenoustothebanks’borrowerfirms.Duetotheenhancedbankscrutiny,weconjecturethatcorporateborrowersofthefailedbankwill

conductasmallernumberofM&Adealsofhigherquality.

Importantly,oursettingfocusessolelyonthestresstestfailureamongstress-test-participatingbanks.Critically,whilenon-participatingandparticipatingbankshavesignificantdifferences,stresstestfailuresarelargelyunpredictable,whichprovidesmoreexogenousshockstoborrowerfirms.Inouranalysis,weincludeborrowerfirmsofbankssubjectedtotheSupervisoryCapitalAssessmentProgram(SCAPhereafter)and/orComprehensiveCapitalAnalysisandReview(CCARhereafter)stresstestsandemployastackedcohortdifference-in-differences(DID)regressionframeworksimilartotheoneemployedin

GormleyandMatsa

(2011).

6

Inparticular,foreachstresstestevent,weform

aneventsubsamplebyfocusingonthequartersbeforeandafterthetestresultrelease

5Forfurtherinformation,see

/publications/files/2018-dfast

-methodology-results-20180621.pdf.

6Becausebankssubjectedtostresstestsareverydifferentfromthosenotsubjectedtostresstests,includingfirmsthatonlyborrowfrombanksnotsubjectedtostresstestscanintroduceselectionbiasintoouranalysisontheimpactofbankstresstestfailureonborrowerM&Aactivities.

5

quarter.Thestresstestsubsamplesarethenstackedtogethertoformthefullsamplefor

ourDIDanalysis.

Consistentwithourconjecture,theresultsfromtheDIDanalysisrevealthatrelativetoborrowerfirmsnotexposedtoabankstresstestfailure,borrowersundertheenhancedscrutinyfromastresstestfailedbanksignificantlyreducetheirM&Aactivityinthequartersfollowingthestress-testresultreleasequarter.Comparedwithfirmsnotexposedtobankstresstestfailures,treatedfirms,onaverage,reducetheirM&Adealvalue(dealcount)by$24.4million(0.01deal)perquarter,whichis68%(20.8%)oftheaveragedealvalue(averagedealcount)perquarterinthesample.Thesefindingsarerobusttocontrollingforvariousborrowerfirmandbankcharacteristicsandfirmandyear-quarter

fixedeffects.

Abankcanfailastresstestbasedonquantitativeorqualitativegrounds.Comparedwithstresstestfailuresbasedonquantitativegrounds(i.e.,oneofthebank’sprojectedcapitalratiosintheadversescenariosislowerthantherequiredminimum),failuresbasedonqualitativegrounds(e.g.,theFederalReserveBoardviewsthebankashavingsubstantialdeficienciesinitsinternalcapitalplanningprocess)areevenmoredifficulttopredict.WefindthatthenegativeeffectofbankstresstestfailuresonborrowerM&Aactivitiesderivesmostlyfromstresstestfailuresbasedonthequalitativegrounds,which

furtheralleviatesendogeneityconcerns.

ApotentialconcernisthataborrowerfirmcouldswitchtoadifferentlenderwhenitsrelationshipbankfailsastresstestandcontinuesacquiringloanstofundM&A(e.g.,

IoannidouandOngena

2010).Wefindthatexcludingrelationshipswitchersthatswitch

awayfromfailedbankswhenengaginginsubsequentM&Afinancingdoesnotaffectourfindings.Furthermore,weexaminewhethertheobservednegativeeffectofbankstresstestfailureonborrowerM&Aactivitymerelyreflectsthepossiblemean-reverting

behaviorinM&Aactivity.Wefindthatthedampeningeffectofbankstresstestfailureon

6

borrowerM&Aactivityremainsqualitativelyunchangedaftercontrollingforborrowers’

previousM&Aactivity.

AnotherconcernisthatthenegativetreatmenteffectmaybedrivenbynonparallelM&Atrendsbeforethestresstestresultisreleased.WeuseadynamicDIDframeworktoidentifytheexacttimingofthetreatmenteffect.WefindthattheenhancedlenderscrutinyonborrowerM&Aactivityonlystartstokickinfromthetestresultreleasequarteronward,butitdoesnotexistinanyofthequarterspriortothetestresultrelease.Thisfindingsuggeststhattheparallel-trendsassumptionfortheefficacyoftheDIDapproachissatisfied,andthetreatmenteffectofstresstestingfailureonborrowerM&Aactivityis

likelycausal.

Wenextconducttestsexaminingthemechanismsthroughwhichbankstresstestfailuresaffectborrowerfirms’M&Aactivities.Banksareknowntoactivelyscreenborrowerloanapplicationstomanagetheirlendingportfoliodefaultrisk.Failingastresstestconstitutesasignificantblowtoabank’sreputation,andthefailedbankneedstochangeitslendingandrisk-managementbehaviortoavoidsubsequentstresstestfailures.Thus,wepositthatthefailedbankmayincreaseitsscrutinyonborrowerfirms’riskyinvestmentprojects,especiallyM&Aprojects,toreduceitsloandefaultrisk,whichcanleadtoasubsequentreductioninborrowerfirms’M&Aactivities.ThisisbecauseM&Acansignificantlyincreasetheacquiringfirms’defaultrisk(

FurfineandRosen

2011

);suchdefaultriskcanbefurtheramplifiedifaM&Adealendsupdestroyingtheacquiring

firm’sshareholdervalue.

Toprovidedirectevidenceonthisenhancedlenderscrutinymechanism,welookatthechangesinthecreditqualityofloansthatarenewlyoriginatedtofundM&Adealsafterbankstresstestfailures.IfthefailedbanksincreasetheirscrutinyonnewM&A-relatedloanapplications,whichleadstoasubsequentreductionintheirborrowerfirms’M&Aactivities,weshouldexpecttoobserveasignificantincreaseinthecreditqualityofnewly

originatedM&Aloansafterthestresstestfailureshocks.

7

Wecollectcomprehensivesupervisorydataonbanks’internalriskratingsofnewlyoriginatedM&A-relatedloansissuedbyCCARstresstestbankstoborrowerfirmsinourmainDIDregressionsample.Theinternalriskratingofaloanreflectsabank’sestimateofthedefaultriskoftheborrowerex-ante;thus,itisanidealmeasureofloanqualityfromthebank’sperspective.Ifbanksenhancetheirscrutinyonborrowers’newM&Aactivitiesaftertheirstresstestfailures,weexpectashifttowardhigherqualityintheirM&Aloanorigination.Indeed,wefindasignificantincreaseinthecreditqualityofnewlyoriginatedM&AloansafterbanksfailtheCCARstresstests,lendingempiricalsupporttotheconjecturethatfailedbanksenhancetheirscrutinyontheirborrowers’newrisky

M&Aactivitiestoincreasecreditqualityandremedytheirreputationloss.

Toprovidefurtherevidenceonenhancedbankscrutiny,wenextinvestigatetheeffectofbankstresstestfailuresonborrowingfirms’M&Adealquality.Weconjecturethatafterastresstestfailure,thefailedbankwillstrengthenitsscrutinyonthequalityofborrowerfirms’newM&Adealstoremedyitsreputationlossandincreasethechanceofpassingfuturestresstests.Hence,M&AdealqualityshouldbeimprovediftheacquirerstillreceivesM&Afinancingviaraisingnewloan(s)fromthefailedbankafterthestresstestfailure(andthussuccessfullygoesthroughtheextrascrutinybythefailedbank).Consistentwiththisconjecture,wefindthatthetreatmenteffectofbankstresstestfailureonthree-daycumulativeabnormalstockreturns(CAR(-1,1))uponborrowerM&Adealannouncementsissignificantlymorepositive(around3.5percentagepointshigheronaverage)whenborrowersfundtheirM&Adealsviaraisingnewloansfromthestresstest

failedbanks.

7

Tofurtherenhancetheidentification,weexaminethesituationwhenborrowingfirmsfinancetheirM&Abyraisingnewloansfromthenon-stress-test-failedbanks.Wedonot

findasimilarimprovementinborrowers’M&Adealqualityafterreleasingstresstest

outcomes.Thefindingsfromthisplacebotestfurtherconfirmthatitistheenhanced

7Itisimportanttonotethataround40%ofM&AdealsinoursamplehavenegativeCAR(-1,1)fortheacquiringfirmsupondealannouncements,indicatingpotentialshareholderwealthdestructionfortheseacquiringfirms.

8

scrutinyfromthestresstestfailedbanksthatincreasesthequalityofborrowers’M&A

deals.Finally,wedocumentapositiveeffectofbankstresstestfailuresonborrowerfirms’returnonassetsinsubsequentquarters.Theincreasedprofitabilityisagainconsistent

withtreatmentfirmsrefrainingfromM&Aactivitiesthatcanharmtheirshareholders.

OurstudycontributestotheliteraturethatinvestigatesthedeterminantsofcorporateM&Aactivitiesanddealperformance.ItisknownthatfirmscanconductM&Atobenefitcorporateexecutivesattheexpenseofshareholders(e.g.,

GrinsteinandHribar

2004;

HarfordandLi

2007;

IshiiandXuan

2014

)and,despiteitssheervolume,M&Aonaveragedoesnotcreateshareholdervalueforacquirers(e.g.,

Andradeetal.

2001;

Bettonetal.

2008

).Ontheotherhand,

BharadwajandShivdasani

(2003)showsthatcorporateM&Afinanced

bybanksareassociatedwithlargeandsignificantlypositiveacquirerannouncementstockreturns.Theliteraturealsoshowsthatbetteracquiringfirmcorporategovernance(

Masulis

etal.

2007),moreacquirer-targettechnologicaloverlap(BenaandLi

2014),andgreater

acquiringfirmorganizationcapital(

Lietal.

2018

)canimproveacquirerprofitabilityfromM&A.WecontributetothisliteraturebyexaminingcorporateM&Aactivitiesunderenhancedlenderscrutinyfollowingtheuniquebankcapitalregulatoryshocksofstresstestfailures.Wedocumentthatborrowerfirmsconductfewerbutbetter-qualitynewM&Adealsaftertheirrelationshipbanksfailaforward-lookingstresstest,highlighting

theimportantroleofenhancinglenderscrutinyindrivingcorporateM&Aoutcomes.

Thisstudyalsocontributestotheclassicliteratureontheeffectsofbankcapitalregulation.Manystudiesdocumentthatthetransitionalcostsofraisingregulatorycapitalquicklymaybehigh,asdoingsomayinducebankstoreallocateorshrinklendingacrossdifferentareas(see,e.g.,

Thakor

2014;

Dagheretal.

2016).

Iranietal.

(2021)findsthat

weaklycapitalizedbanksreduceloanexposurewhenfacedwithatighteningofbankcapitalregulation,andtheeffectsarestrongerforloanswithhighercapitalrequirements(riskweights)andattimeswhenbankcapitalismorecostly.Furthermore,

Groppetal.

(2019)examinetheimpactofthe2011capitalexerciseconductedbytheEuropeanBanking

9

Authorityandshowthatthereducedlendingfromthetreatedbanksthatarerequiredtoincreasetheircapitalratiosresultsinlowerasset,investment,andsalesgrowthfortheirborrowerfirms.Ontheotherhand,researchdoeshighlightthepositiveroleofbankcapitalregulationonbanks’riskmanagementpractices(e.g.,

BaselCommittee

2010;

Acharyaetal.

2018).Importantly,closelytiedtothefindingsofourpaper,

Begenau

(2020)demonstrates

thatahighercapitalrequirementincreasesbanks’monitoringincentives,whichimprovestheefficiencyofbanks’activities.ThisstudyisamongthefirsttodemonstratethattightenedcapitalrequirementsasaresultofbankstresstestingfailureshaveanuancedeffectoncorporateM&Aactivity.

8

TheenhancedlenderscrutinylinkedtotightercapitalconstraintsfacedbybankscanpositivelyinfluencetheperformanceofM&Adealsandtheoverallperformanceoftreatedborrowerfirms.Thefindingsofthestudythusimplythat

theunforeseenpositivespillovereffectofsupervisorystresstestsshouldnotbeignored.

2InstitutionalBackgroundandData

2.1SupervisoryStressTestsasaCornerstoneinthepost-GFCCapitalRegulatoryFramework

Stresstestshavebecomeacornerstoneofpost-crisisbankcapitalregulationintheUnitedStates.Unliketraditionalwaysofbankcapitalregulatoryandsupervisorytools,suchasbankexamsandBaselIandIIrulesthataremostlybackward-looking,stresstestsaretheonlyforward-lookingsupervisorytoolthatassesseswhetherabankhassufficientcapitaltodaytocoverlossesfromfuturepotentialeconomicdownturns(

Greenwood

etal.

2017)

.Thefirststresstest,theSCAPtest,waslaunchedbytheFederalReserveamidtheGreatRecessionin2009.ItsintendedgoalwastoensurethatlargeU.S.banks

hadenoughcapitaltowithstandthelargelossesthatoccurredduringthecrisis.The

8ThesupervisorystresstestisaproprietaryprocesscontrolledbytheFederalReserve,notbythebankoritsborrowerfirms.Consideringthesizeofthestresstestbanks,theprobabilityofabankfailingastresstestduetohiddenfactorsrelatedtoaparticularborrowerfirm’sactionsisminimal.Thus,itisauniqueandidealresearchsettingthatexploitsthechangesinscrutinyincentivesfromthebank’ssidethatareexogenoustoborrowerfirms.

10

successoftheSCAPinrestoringmarketconfidenceinlargebankspavedthewayforthesubsequentregularstresstestsforlargebankholdingcompanies(BHCshereafter).SincetheenactmentoftheDodd-FrankActin2010,bankshavesteadilyincreasedtheircorecapital.

9

Forinstance,the18participatingBHCsinthe2019testroundhavesubstantiallyincreasedtheircommonequitycapitalbymorethan$680billion(morethandoublingtherisk-weightedratio)sincethefirstroundofstresstestsledbytheFederalReservein

2009

.10

UndertheDodd-FrankAct,theFederalReserveismandatedtoassesstheadequacyofbanks’capitalagainstaseriesofmacroeconomicscenariosfeaturingsevereadverseeconomicshocks,suchasasuddencollapseoftheequitymarketorasharpriseintheunemploymentrate.Inparticular,theDodd-FrankActStressTests(DFAST)relyonpro-prietarymodelsdevelopedbytheFederalReserve.Thesetestsprojectbanks’capitalratiosbasedonrevenueandlossesfrombanks’loans,securities,tradingaccounts,operations,andcounterpartyexposuresoveranine-quarterprojectionhorizonunderastandardizedsetofassumptionsaboutbanks’capitaldistributionduringtheprojectedperiod.

11

Startingin2011,theFederalReservebeganconductingtheannualCCARstresstesttodeterminethecapitaladequacyoflargeBHCsunderitssupervision.TherearetwomajordifferencesbetweenCCARandDFAST.First,althoughCCARusesthesameestimatedlossesandrevenuenumbersasintheDFASTexercise,itreliesonbanks’actualnine-quartercapitalplanoncapitalissuancesanddistributionsratherthanthestandardizedassumption.Second,theminimumratiosonprojectedcapitalsetbyCCARarebinding,andBHCsthatfailthetestarenotallowedtodistributedividendsorrepurchasesharesasstatedintheir

capitalplans.

12

9See

/newsevents/speech/bernanke20100506a.htm

.10See

/newsevents/pressreleases/bcreg20170628a.htm

.

11Inparticular,DFASTassumesthatbankspayoutcommonstockdividendsatthesamelevelasintheprioryearandthattherearenonetcapitalissuances.

12ThedisclosuresoftheDFASTandCCARresultshappenalmostatthesametimeeachyear(onlyoneortwoweeksapart).TheFederalReserve’sdecisiononobjectingtoaBHC’scapitalplanisbasedonlyontheCCARresults,whilethereisnominimumcapitalrequirementlinkedtoDFAST(i.e.,BHCsdonotfailaDFASTtest).

11

CCARevaluatesBHCs’capitaladequacyaswellasthecapitalplanningprocesses,

andtheFederalReserveBoardcanobjecttoBHCs’capitalplansoneitherquantitativeorqualitativegrounds.ThequantitativeexerciseincludedintheCCARissimilartoDFASTandevaluateswhetherBHCsmaintainsufficientcapitaltocontinueoperationsthroughouttimesofeconomicandfinancialmarketstress.ThequalitativeassessmentevaluatesthecapitalplanningprocessfortheBHCsandlooksintotheirriskmanagement,internalcontrols,andgovernancepractices,focusingonaddressingthepotentialrisksstemming

frombaselineandstressedoperatingconditions.

TheFederalReservedisclosestheoutcomeofthestresstestsannuallyintheCCARreport.Banksthatfailedthetestbybreachingtheminimumcapitalthresholdsetinthequantitativeexerciseorbynotpassingthequalitativeassessmentmustrefrainfromdistributingdividendsornetsharerepurchasesasplannedinthefollowingquarter.AbankthatreceivesanobjectiontoitssubmittedcapitalplaneitherbasedonqualitativeorquantitativeassessmentfromtheFederalReserveBoardisrequiredtomakesubstantial

changesandresubmititscapitalplans,andwedefinesuchabankasafailedbank.

13

BanksareincludedintheannualCCARstresstestingexerciseiftheirassetsizemeetsacertainthreshold.Nineteenlargebankswithassetsizesover$100billionparticipatedin

theSCAPstresstestin2009.Theassetsizethresholdwasrevisedto$50billionafterthe

enactmentoftheDodd-FrankAct,andthetotalnumberofparticipantsincreasedfrom29in2011to33in2016.Inthisstudy,weincludesixroundsofstresstestexercisescoveringtheperiodfrom2009to2016.

14

AnoverviewoftheparticipatingBHCsandtheoutcomes

ofthestresstestsacrossdifferentroundsareshowninTable

OA2

intheOnlineAppendix.

13Similartoaqualitativeobjectiontothesubmittedcapitalplan,aconditionalnon-objectionisalsobasedonthequalitativeground.Abankthatreceivesaconditionalnon-objectionfromtheFederalReserveBoardmustalsoaddressallweaknessesinitscapitalplanandcapitalplanningprocessandresubmitanewcapitalplan(withinsixmonthsafte