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BOARD OF GOVERNORS

OF THE

FEDERAL RESERVE SYSTEM

WASHINGTON, D.C. 20551

DIVISION OF BANKING

SUPERVISION AND REGULATION

SR 15-19

December 18, 2015

Revised January 15, 

2021

In January 2021, this letter was modified to apply to U.S. bank holding companies, U.S. 

intermediate holding companies of foreign banking organizations, and covered savings and loan 

holding companies that are subject to Category II or III standards under the Board’s tailoring 

framework.

1 These applicability modifications align with the Board’s tailoring rules. See 84 Fed. 

Reg. 59032 (November 1, 2019) for more information.

TO THE OFFICER IN CHARGE OF SUPERVISION

AT EACH FEDERAL RESERVE BANK

SUBJECT: Federal Reserve Supervisory Assessment of Capital Planning and Positions for 

Firms Subject to Category II or III Standards

Applicability: This guidance applies only to U.S. bank holding companies, U.S. intermediate 

holding companies of foreign banking organizations, and covered savings and loan holding 

companies that are subject to Category II or III standards under the Board’s tailoring framework.

The Federal Reserve is issuing this letter to explain its supervisory expectations for 

capital planning at firms subject to Category II or III standards, consistent with the broad 

supervisory expectations set forth in SR letter 12-17/CA letter 12-14, “Consolidated Supervision 

Framework for Large Financial Institutions.”2 Capital is central to a firm’s ability to absorb 

unexpected losses and continue to lend to creditworthy businesses and consumers. Therefore, a

firm’s processes for managing and allocating its capital resources are critical to its financial 

strength and resiliency, and also to the stability and effective functioning of the U.S. financial 

system. The attached guidance provides the Federal Reserve’s core capital planning expectations 

1 This guidance previously applied to U.S. bank holding companies and intermediate holding companies of foreign 

banking organizations that have total consolidated assets of at least $50 billion but less than $250 billion, have 

consolidated total on-balance sheet foreign exposure of less than $10 billion, and are not otherwise subject to the 

Federal Reserve’s Large Institution Supervision Coordinating Committee (LISCC) framework.

2 The term “capital planning process” used in this document, which aligns with terminology in SR 12-17/ CA 12-14, 

is equivalent to the term “capital adequacy process” used in other Federal Reserve documents. 
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for firms subject to Category II or III standards, building upon the capital planning requirements 

in the Federal Reserve’s capital plan rule and stress test rules.3,4

The guidance outlines capital planning expectations for:

• Governance 

• Risk management

• Internal controls 

• Capital policy

• Scenario design

• Projection methodologies

Further, the attached guidance includes several appendices that detail supervisory 

expectations on a firm’s capital planning process. This guidance largely consolidates the Federal 

Reserve’s existing capital planning guidance, including:

• Capital Planning at Large Bank Holding Companies: Supervisory Expectations and 

Range of Current Practice (August 2013)5

• Comprehensive Capital Analysis and Review 2015 Summary Instructions and Guidance 

(October 2014)6

• Instructions for the Capital Assessments and Stress Testing information collection

(Reporting Form FR Y-14A), (OMB No. 7100-0341)

7

• SR letter 11-7, “Supervisory Guidance on Model Risk Management”

• SR letter 12-7, “Supervisory Guidance on Stress Testing for Banking Organizations with 

More Than $10 Billion in Total Consolidated Assets”

• SR letter 12-17/CA letter 12-14, “Consolidated Supervision Framework for Large 

Financial Institutions”

3 For the capital plan rules, refer to section 225.8 of Regulation Y (12 CFR 225.8) and section 238.170 of Regulation 

LL (12 CFR 238.170). Regulation Q (12 CFR part 217) establishes minimum capital requirements and overall 

capital adequacy standards for Federal Reserve-regulated institutions. Regulation YY (12 CFR part 252) and 

Regulation LL (12 CFR part 238) establish capital stress testing requirements for bank holding companies and 

covered savings and loan holding companies, respectively, with total consolidated assets of $100 billion or more.

4 With the issuance of this letter, SR letter 99-18, “Assessing Capital Adequacy in Relation to Risk at Large Banking 

Organizations and Others with Complex Risk Profiles,” is superseded. In addition, SR letter 09-4, “Applying 

Supervisory Guidance and Regulations on the Payment of Dividends, Stock Redemptions, and Stock Repurchases at 

Bank Holding Companies,” is superseded with respect to firms subject to this guidance.

5 Available at: http://www.federalreserve.gov/bankinforeg/bcreg20130819a1.pdf.

6 Available at: http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20141017a1.pdf.

7 Available at: 

http://www.federalreserve.gov/apps/reportforms/reportdetail.aspx?sOoYJ+5BzDa2AwLR/gLe5DPhQFttuq/4.
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Applicability

This guidance applies to U.S. bank holding companies, U.S. intermediate holding 

companies of foreign banking organizations, and covered savings and loan holding companies8

that are subject to Category II or III standards under the Board’s tailoring framework.

9,10, 11

The Federal Reserve has different expectations for sound capital planning and capital 

adequacy depending on the size, scope of operations, activities, and systemic importance of a 

firm. The Federal Reserve has separate guidance, set forth in SR letter 15-18, that clarifies that 

expectations for firms subject to Category I standards are higher than the expectations for firms 

subject to Category II or III standards.

Federal Reserve Banks should distribute this letter to firms subject to Category II or III 

standards in their districts as well as to appropriate supervisory staff. Questions regarding this 

guidance may be directed to the following Board staff: Lisa Ryu, Associate Director, at (202) 

263-4833, or David Palmer, Senior Supervisory Financial Analyst, at (202) 452-2904. In 

addition, questions may be sent to the secure CCAR Communications mailbox or via the Board’s 

public website.12

Michael S. Gibson

Director

Attachment

• Federal Reserve Guidance on Supervisory Assessment of Capital Planning and Positions 

for Firms Subject to Category II or III Standards

Cross References to:

• SR letter 15-3, “FFIEC Information Technology Examination Handbook”

• SR 13-19/CA 13-21, “Guidance on Managing Outsourcing Risk”

8 A covered savings and loan holding company is a savings and loan holding company not predominantly engaged

in insurance or commercial activities (see 12 CFR 217.2).

9 Firms subject to Category I standards are U.S. global systemically important bank holding companies (GSIBs).

Firms subject to Category II standards include banking organizations with $700 billion or more in total consolidated 

assets; or $75 billion or more in cross-jurisdictional activity; and do not meet the criteria for Category I.

Firms subject to Category III standards include banking organizations with $250 billion or more in total

consolidated assets; or banking organizations with $100 billion or more in total consolidated assets and $75 billion 

or more in weighted short-term wholesale funding, total nonbank assets, or off-balance sheet exposure; and do not 

meet the criteria for Category I or II.

10 This guidance does not apply to nonbank financial companies designated by the Financial Stability Oversight 

Council for supervision by the Board of Governors.

11 Firms should refer to this guidance in the development of the capital plans that they will submit by April 5, 2021, 

and for subsequent years.

12 See: http://www.federalreserve.gov/apps/contactus/feedback.aspx.
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• SR letter 13-1/CA letter 13-1, “Supplemental Policy Statement on the Internal Audit 

Function and Its Outsourcing”

• SR letter 12-17/CA letter 12-14, “Consolidated Supervision Framework for Large 

Financial Institutions”

• SR letter 12-7, “Supervisory Guidance on Stress Testing for Banking Organizations with 

More Than $10 Billion in Total Consolidated Assets”

• SR letter 11-7, “Supervisory Guidance on Model Risk Management”

Supersedes:

• SR letter 99-18, “Assessing Capital Adequacy in Relation to Risk at Large Banking 

Organizations and Others with Complex Risk Profiles”

• SR letter 09-4, “Applying Supervisory Guidance and Regulations on the Payment of 

Dividends, Stock Redemptions, and Stock Repurchases at Bank Holding Companies”

Note: This SR letter is superseded for a U.S. bank holding company or an intermediate 

holding company of a foreign banking organization with $50 billion or more in total 

consolidated assets.
December 18, 2015 Attachment SR 15-19

Revised January 15, 2021

OMB No. 7100-0341 Page 1 of 31

OMB No. 7100-0342

Federal Reserve Guidance on

Supervisory Assessment of Capital Planning and Positions for

Firms Subject to Category II or III Standards

In January 2021, this attachment was modified to apply to U.S. bank holding companies, 

U.S. intermediate holding companies of foreign banking organizations, and covered savings and 

loan holding companies that are subject to Category II or III standards under the Board’s 

tailoring framework.

1

 These applicability modifications align with the Board’s tailoring rules. 

See 84 Fed. Reg. 59032 (November 1, 2019) for more information.

I. Introduction

This guidance provides the Federal Reserve’s core capital planning expectations for firms

subject to Category II or III standards under the Board’s tailoring framework,

2 building upon the 

capital planning requirements included in the Board’s capital plan rule and stress test rules. This 

guidance outlines capital planning expectations3 for these firms in the following areas:

• Governance 

• Risk management

• Internal controls 

• Capital policy

• Incorporating stressful conditions and events

• Estimating impact on capital positions

Further, this guidance provides detailed supervisory expectations on a firm’s capital 

planning process in the following appendices:

1 This guidance previously applied to U.S. bank holding companies and intermediate holding companies of foreign 

banking organizations that have total consolidated assets of at least $50 billion but less than $250 billion, have 

consolidated total on-balance sheet foreign exposure of less than $10 billion, and are not otherwise subject to the 

Federal Reserve’s Large Institution Supervision Coordinating Committee (LISCC) framework.

2 See 84 Fed. Reg. 59032 (November 1, 2019). Firms subject to Category I standards are U.S. holding companies 

identified as global systemically important bank holding companies (U.S. GSIBs).

Firms subject to Category II standards include banking organizations with $700 billion or more in total consolidated 

assets; or $75 billion or more in cross-jurisdictional activity; and do not meet the criteria for Category I.

Firms subject to Category III standards include banking organizations with $250 billion or more in total

consolidated assets; or banking organizations with $100 billion or more in total consolidated assets and $75 billion 

or more in weighted short-term wholesale funding, total nonbank assets, or off-balance sheet exposure; and do not 

meet the criteria for Category I or II.

3 Note that these expectations build upon the capital planning requirements set forth in the Board’s capital plan rules 

and stress test rules (12 CFR 225.8; 12 CFR 238, subparts O, P, and S; 12 CFR 252, subparts E and F). Other 

relevant rules pertaining to the Board’s regulatory regime for capital planning and positions are described in Section 

II, “Regulatory Requirements for Capital Positions and Planning.”
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A. Use of Models and Other Estimation Approaches

B. Model Overlays

C. Use of Benchmark Models in the Capital Planning Process

D. Sensitivity Analysis and Assumptions Management

E. Role of the Internal Audit Function in the Capital Planning Process

F. Capital Policy

G. Scenario Design

H. Risk-weighted Asset (RWA) Projections

I. Operational Loss Projections

This guidance applies to U.S. bank holding companies, U.S. intermediate holding 

companies of foreign banking organizations, and covered savings and loan holding companies

that are subject to Category II or III standards under the Board’s tailoring framework.

4,5,6 The 

guidance describes minimum examiner expectations when applying the capital plan rules and 

stress test rules to such firms. 

The Federal Reserve has different expectations for sound capital planning and capital 

adequacy depending on the size, scope of operations, activities, and systemic importance of a 

firm. The Federal Reserve has separate guidance, set forth in SR 15-18, that clarifies that 

expectations for firms subject to Category I standards are higher than the expectations for firms 

subject to Category II or III standards.

II. Regulatory Requirements for Capital Positions and Planning

Sound capital planning for any firm begins with adherence to all applicable rules and 

regulations relating to capital adequacy. Certain Federal Reserve regulations form the basis of 

the regulatory framework for capital positions and capital planning:

1) Regulation Q (12 CFR part 217), Capital Adequacy Requirements for Boardregulated Institutions; 

2) Subparts E and F of Regulation YY (12 CFR part 252, subparts E and F) and 

Subparts O and P of Regulation LL (12 CFR part 238, subparts O and P); and

3) Section 225.8 of Regulation Y (12 CFR 225.8) and subpart S of Regualtion LL (12 

CFR part 238, subpart S), together known as the capital plan rules.

4 This guidance does not apply to nonbank financial companies designated by the Financial Stability Oversight 

Council for supervision by the Board of Governors.

5 A covered savings and loan holding company is a savings and loan holding company not predominantly engaged 

in insurance or commercial activities (see 12 CFR 217.2).

6 Firms should refer to this guidance in the development of the capital plans that they will submit by April 5, 2021, 

and for subsequent years.
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OMB No. 7100-0342

Regulation Q establishes minimum capital requirements and overall capital adequacy 

standards for Federal Reserve-regulated institutions. Among other things, Regulation YY and 

Regulation LL establish capital stress testing requirements for bank holding companies and 

covered savings and loan holding companies, respectively, with total consolidated assets of 

$100 billion or more. The capital plan rules establish general capital planning requirements for a 

bank holding company or covered savings and loan holding company with total consolidated 

assets of $100 billion or more and requires such a firm to develop an annual capital plan that is 

approved by its board of directors.

This guidance provides the Federal Reserve’s core capital planning expectations for firms 

subject to this guidance, building upon the capital planning requirements in the Federal 

Reserve’s capital plan rule and stress test rules.7

III. Capital Planning Expectations

Capital is central to a firm’s ability to absorb unexpected losses and continue to lend to 

creditworthy businesses and consumers. A firm’s capital planning processes are critical to its 

financial strength and resiliency. 

SR letter 12-17/CA letter 12-14, “Consolidated Supervision Framework for Large 

Financial Institutions,” outlines core expectations for sound capital planning for bank holding 

companies with total consolidated assets of $50 billion or more. This capital planning and 

positions guidance provides additional details around the Federal Reserve’s core capital planning 

expectations for firms subject to Category II or III standards, building on the capital planning 

requirements included in the capital plan rule and the Board’s stress test rules.8 A firm should 

maintain a sound capital planning process on an ongoing basis, including in between submissions 

of its annual capital plan.

9

A. Governance

The Federal Reserve expects a firm to have sound governance over its capital planning 

process. In general, senior management should establish the capital planning process and the 

board of directors should review and periodically approve that process. 

7 With the issuance of this letter, SR letter 99-18, “Assessing Capital Adequacy in Relation to Risk at Large Banking 

Organizations and Others with Complex Risk Profiles,” is superseded and SR letter 09-4, “Applying Supervisory 

Guidance and Regulations on the Payment of Dividends, Stock Redemptions, and Stock Repurchases at Bank 

Holding Companies” is superseded with respect to firms subject to this guidance, as applicable.

8 The capital planning process described in this guidance is broadly equivalent to an internal capital adequacy 

assessment process (ICAAP) under the Federal Reserve’s advanced approaches capital guidelines. The expectations 

articulated in this document are consistent with the U.S. federal banking agencies’ supervisory guidance relating to 

the ICAAP (see 73 FR 44620 (July 31, 2008)). 

9 The term “capital planning process” used in this document, which aligns with terminology in SR 12-17/CA 12-14, 

is equivalent to the term “capital adequacy process” used in other Federal Reserve documents.
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1. Board of Directors

A firm’s board of directors is ultimately responsible and accountable for the firm’s 

capital-related decisions and for capital planning. The firm’s capital planning should be 

consistent with the strategy and risk appetite set by the board and with the firm’s risk levels, 

including how risks at the firm may emerge and evolve under stress. The board must annually 

review and approve the firm’s capital plan.10

The board should direct senior management to provide a briefing on their assessment of 

the firm’s capital adequacy at least quarterly, and whenever economic, financial, or firm-specific 

conditions warrant a more frequent update. The briefing should describe whether current capital 

levels and planned capital distributions remain appropriate and consistent with capital goals (see 

Section III.D, “Capital Policy”). In their briefing, senior management should also highlight for 

the board any problem areas related to capital planning identified by senior management, internal 

audit, or supervisors.

The board should hold senior management accountable for providing sufficient 

information on the firm’s material risks and exposures to inform board decisions on capital 

adequacy and actions, including capital distributions. Information provided to the board should 

be clear, accurate, and timely. The board should direct senior management to provide this 

information at least quarterly and whenever economic, financial, or firm-specific conditions 

warrant a more frequent update. The information presented to the board should include 

consideration of a number of factors, such as:

• Macro-economic conditions and relevant market events;

• Current capital levels relative to budgets and forecasts;

• Post-stress capital goals and targeted real time capital levels (see section III.D, 

“Capital Policy”);

• Enterprise-wide and line-of-business performance; 

• Expectations from stakeholders (including shareholders, regulators, investors, 

lenders, counterparties, and rating agencies);

• Potential sources of stress to the firm’s operating performance; and

• Risks that may emerge only under stressful conditions.

After receiving the information, the board should be in a position to understand the major 

drivers of the firm’s projections under a range of conditions, including baseline and stress 

scenarios. 

The board should direct senior management to provide information about the firm’s 

estimation approaches, model overlays, and assessments of model performance (see Appendix A, 

“Use of Models and Other Estimation Approaches” and Appendix B, “Model Overlays). The 

board should also receive information about uncertainties around projections of capital needs or 

10 12 CFR 225.8(e)(1)(iii).
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limitations within the firm’s capital planning process to understand the impact of these 

weaknesses on the process. This information should include key assumptions and the analysis of 

sensitivity of a firm’s projections to changes in the assumptions (see Appendix D, “Sensitivity 

Analysis and Assumptions Management”). The board should incorporate uncertainties in 

projections and limitations in the firm’s capital planning process into its decisions on capital 

adequacy and capital actions. It should also review and approve mitigating steps to address 

capital planning process weaknesses.

The board should direct senior management to establish sound controls for the entire 

capital planning process. The board should approve policies related to capital planning, and 

review them annually. The board should also approve capital planning activities and strategies. 

The board of directors should maintain an accurate record of its meetings pertaining to the firm’s 

capital planning process. 

2. Senior Management 

Senior management should direct staff to implement board-approved capital policies, 

capital planning activities, and strategies in an effective manner. Senior management should 

make informed recommendations to the board regarding the firm’s capital planning and capital 

adequacy, including post-stress capital goals and capital distribution decisions. Senior 

management’s proposed capital goals and capital distributions should have analytical support 

and take into account the expectations of important stakeholders, including shareholders, rating 

agencies, counterparties, depositors, creditors, and supervisors. 

Senior management should design and oversee the implementation of the firm’s capital 

planning process; identify and assess material risks and use appropriate firm-specific scenarios in 

the firm’s stress test; monitor and assess capital planning practices to identify limitations and 

uncertainties and develop remediation plans; understand key assumptions used throughout a 

firm’s capital planning process and assess the sensitivity of the firm’s projections to those 

assumptions (see Appendix D, “Sensitivity Analysis and Assumptions Management”); and 

review the capital planning process at least semi-annually. 

Senior management should establish a process for independent review of the firm’s 

capital planning process, including the elements outlined in this guidance. The independent 

review process should be designed to identify the weaknesses and limitations of the capital 

planning process and the potential impact of those weaknesses on the process. Senior 

management should also develop remediation plans for any identified weaknesses affecting the 

reliability of capital planning results. Both the specific identified weaknesses and the remediation 

plans should be reported to the board of directors in a timely manner. 

Differences in Expectations for firms subject to Category I standards,

as compared to firms subject to Category II or III standards

The Federal Reserve expects senior management of a firm subject to Category I standards to 

have a higher level of engagement in the capital planning process than the senior management of 
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a firm subject to Category II or III standards. Specifically, senior management of a firm subject 

to Category I standards should review the capital planning process quarterly, whereas senior 

management of a firm subject to Category II or III standards should review the capital planning 

process at least semi-annually.

B. Risk Management 

A firm should have a risk management infrastructure that appropriately identifies, 

measures, and assesses material risks and provides a strong foundation for capital planning.11

This risk management infrastructure should be supported by comprehensive policies and 

procedures, clear and well-established roles and responsibilities, and strong and independent 

internal controls. In addition, the risk management infrastructure should be built upon sound 

information technology and management information systems. The Federal Reserve’s 

supervisory assessment of the sufficiency of a firm’s capital planning process will depend in 

large part on the effectiveness of the firm’s risk management infrastructure and the strength of its 

process to identify unique risks under normal and stressful conditions, as well as on the strength 

of its overall governance and internal control processes. 

1. Risk Identification and Assessment Process 

A firm’s risk identification process should include a comprehensive assessment of risks 

stemming from its unique business activities and associated exposures. The assessment should 

include on-balance sheet assets and liabilities, off-balance sheet exposures, vulnerability of the 

firm’s earnings, and other major firm-specific determinants of capital adequacy under normal 

and stressed conditions. This assessment should also capture those risks that only materialize or 

become apparent under stressful conditions.

The specifics of the risk identification process will differ across firms given differences 

in organizational structure, business activities, and size and complexity of operations. However, 

the risk identification process at all firms subject to this guidance should be dynamic, inclusive, 

and comprehensive, and drive the firm’s capital adequacy analysis. A firm should:

• Evaluate material risks across the enterprise to ensure comprehensive risk capture on 

an ongoing basis;

• Actively monitor its material risks; and

• Use identified material risks to inform key aspects of the firm’s capital planning, 

including the development of stress scenarios, the assessment of the adequacy of 

post-stress capital levels, and the appropriateness of potential capital actions in light 

of the firm’s capital objectives.

A firm should be able to demonstrate how material risks are accounted for in its capital 

planning process. For risks not well captured by scenario analysis, the firm should clearly 

11 12 CFR 225.8(e)(2).
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articulate how the risks are otherwise captured and addressed in the capital planning process and 

factored into decisions about capital needs and distributions.

2. Risk Measurement and Risk Materiality 

A firm should have a sound risk measurement process that informs senior management 

about the size and risk characteristics of exposures and business activities under both normal and 

stressful operating conditions. A firm should employ risk measurement approaches that are 

appropriate for its size, complexity and risk profile.

Identified weaknesses, limitations, biases, and assumptions in the firm’s risk 

measurement processes should be assessed for their potential impact on the integrity of a firm’s 

capital planning process (see Appendix D, “Sensitivity Analysis and Assumptions 

Management”). A firm should have a process in place for determining materiality in the context 

of material risk identification and capital planning. This process should include a sound analysis 

of relevant quantitative and qualitative considerations, including, but not limited to, the firm’s 

risk profile, size, and complexity, and their effects on the firm’s projected regulatory capital 

ratios in stressed scenarios.12

A firm should identify how and where its material risks are accounted for within the 

capital planning process. The firm should be able to specify material risks that are captured in its 

scenario design, the approaches used to estimate the impact on capital, and the risk drivers 

associated with each material risk. 

12 For simplicity, the terms “quantitative” and “qualitative” are used to describe two different types of approaches, 

with the recognition that all quantitative estimation approaches involve some qualitative/judgmental aspects, and 

qualitative estimation approaches produce quantitative output.
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Differences in Expectations forfirms subject to Category I standards,

as compared to firms subject to Category II or III standards

The Federal Reserve expects a firm subject to Category I standards to have a more formal risk 

identification process with quarterly updates, identify difficult-to-quantify risks, segment risks at 

more granular levels, involve multiple stakeholders across the firm in identifying material risks, 

critically assess risk transfer techniques, and use quantitative approaches supported by expert 

judgment for risk management. In contrast, the Federal Reserve expects a firm subject to 

Category II or III standards to have a less formal risk identification process, has lower 

expectations regarding identification of difficult-to-quantify risks, segmentation, engagement 

with stakeholders, and assessment of risk transfer techniques, and provides the option for a firm 

subject to Category II or III standards to use either qualitative or quantitative risk measurement 

approaches for risk management.

C. Internal Controls

A firm should have a sound internal control framework that helps ensure that all aspects 

of the capital planning process are functioning as designed and result in sound assessments of the 

firm’s capital needs. The framework should include:

• An independent internal audit function;

• Independent review and validation practices; and

• Integrated management information systems, effective reporting, and change control 

processes.

A firm’s internal control framework should support its entire capital planning process, 

including the sufficiency of and adherence to policies and procedures; risk identification, 

measurement, and management practices and systems used to produce input data; and the 

models, management overlays, and other methods used to generate inputs to post-stress capital

estimates. Any part of the capital planning process that relies on manual procedures should 

receive heightened attention. The internal control framework should also assess the aggregation 

and reporting process used to produce reports to senior management and to the board of directors

and the process used to support capital adequacy recommendations to the board.

1. Comprehensive Policies, Procedures and Documentation for Capital Planning

A firm should have policies and procedures that support consistent and repeatable capital 

planning processes.

13 Policies and procedures should describe the capital planning process in a 

manner that informs internal and external stakeholders of the firm’s expectations for internal 

practices, documentation, and business line controls. The firm’s documentation should be 

sufficient to provide relevant information to those making decisions about capital actions. The 

13 See Instructions for the Capital Planning and Stress Testing Information Collection (Reporting Form FR Y-14A), 

Appendix A (Supporting Documentation), available at: 

http://www.federalreserve.gov/apps/reportforms/reportdetail.aspx?sOoYJ+5BzDa2AwLR/gLe5DPhQFttuq/4.
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documentation should also allow parties unfamiliar with a process or model to understand 

generally how it operates, as well as its main limitations, key assumptions, and uncertainties.

Policies and procedures should also clearly identify roles and responsibilities of staff 

involved in capital planning and provide accountability for those responsible for the capital 

planning process. A firm should also have an established process for policy exceptions. Such 

exceptions should be approved by the appropriate level of management based upon the gravity of 

the exception. Policies and procedures should reflect the firm’s current practices, and be 

reviewed and updated as appropriate, but at least annually.

2. Model Validation and Independent Review of Estimation Approaches

Models used in the capital planning process should be reviewed for suitability for their 

intended uses. A firm should give particular consideration to the validity of models used for 

calculating post-stress capital positions. In particular, models designed for ongoing business 

activities may be inappropriate for estimating losses, revenue, and expenses under stressed 

conditions. If a firm identifies weaknesses or uncertainties in a material model, the firm should 

make adjustments to model output if the findings would otherwise result in the material 

understatement of capital needs (see Appendix B, “Model Overlays”). If the deficiencies are 

critical, the firm should restrict the use of the model, apply overlays, or avoid using the model

entirely.

A firm should independently validate or otherwise conduct effective challenge of models 

used in internal capital planning, consistent with supervisory guidance on model risk 

management, with priority given to more material models.14 The model review and validation 

process should include an evaluation of conceptual soundness of models and ongoing monitoring

of the model performance. The firm’s validation staff should have the necessary technical 

competencies, sufficient stature within the organization, and appropriate independence from 

model developers and business areas to provide a critical and unbiased evaluation of the 

estimation approaches.

A firm should maintain an inventory of all estimation approaches used in the capital 

planning process, including models used to produce projections or estimates used by the models 

that generate final loss, revenue, expense, and capital projections.15 Material models should 

receive greater attention.

16 The intensity and frequency of validation work should be a function 

of the importance of those models in generating estimates of post-stress capital.

14 See SR letter 11-7, “Supervisory Guidance on Model Risk Management.” The term “effective challenge” means 

critical review by objective, informed parties who have the proper incentives, competence, and influence to 

challenge the model and its results. 

15 The definition of a model covers quantitative approaches whose inputs are partially or wholly qualitative or based 

on expert judgment, provided that the output is quantitative in nature. 

16 Materiality of the model is a function of both the importance of the business or portfolio assessed and the impact 

of the model on the firm’s overall results.
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Not all models can be fully validated prior to use in capital planning. However, a firm

should make efforts to conduct a conceptual soundness review of its material models prior to 

their use in capital planning. If such a conceptual soundness review is not possible, the absence 

of that review should be made transparent to users of model output and the firm should 

determine whether the use of compensating controls (such as conservative adjustments) are 

warranted.

Further, a firm should treat output from material models for which there are model risk 

management shortcomings with caution. 

3. Management Information Systems and Change Control Processes

A firm should have internal controls that ensure the integrity of reported results and that

make certain the firm is identifying, documenting, reviewing, and tracking all material changes 

to the capital planning process and its components. The firm should ensure that such controls 

exist at all levels of the capital planning process. Specific controls should ensure:

• Sufficiently sound management information systems to support the firm’s capital

planning process;

• Comprehensive reconciliation and data integrity processes for key reports;

• The accurate and complete presentation of capital planning process results, including 

a description of adjustments made to compensate for identified weaknesses; and

• That information provided to senior management and the board is accurate and 

timely.

Many of the processes used to assess capital adequacy, including models, data, and 

management information systems, are tightly integrated and interdependent. As a result, a firm

should ensure consistent change control oversight across the entire firm, in line with existing 

supervisory guidance.17 A firm should establish and maintain a policy describing minimum 

internal control standards for managing change in capital planning process policies and 

procedures, model development, information technology, and data. Control standards for these 

areas should address risk, testing, authorization and approval, timing of implementation, and

post-installation verification.

4. Internal Audit Function

Internal audit should play a key role in evaluating capital planning and the elements 

described in this guidance to ensure that the entire process is functioning in accordance with 

supervisory expectations and the firm’s policies and procedures. Internal audit should review the 

manner in which deficiencies are identified, tracked, and remediated. Furthermore, internal audit 

17 Federal Financial Institutions Examination Council, “IT Examination Handbook—Operations Booklet,” available 

at: http://ithandbook.ffiec.gov/ITBooklets/FFIEC_ITBooklet_Operations.pdf. See also SR letter 15-3, “FFIEC 

Information Technology Examination Handbook.”
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should ensure appropriate independent review and challenge is occurring at all key levels within 

the capital planning process.

As discussed further in Appendix E, “Role of the Internal Audit Function in the Capital 

Planning Process,” internal audit staff should have the appropriate competence and influence to 

identify and escalate key issues. All deficiencies, limitations, weaknesses and uncertainties 

identified by the internal audit function that relate to the firm’s capital planning process should 

be reported to senior management, and material deficiencies should be reported to the board of 

directors (or the audit committee of the board) in a timely manner.

18

Differences in Expectations for firms subject to Category I standards,

as compared to firms subject to Category II or III standards

The Federal Reserve expects a firm subject to Category I standards to complete a conceptual 

soundness review of all models prior to use, maintain comprehensive documentation of its 

capital planning process, and have compensating controls for known model uncertainties. In 

contrast, the Federal Reserve expects a firm subject to Category II or III standards to make an 

effort to review its material models prior to use; further, the Federal Reserve has lower 

expectations regarding documentation and compensating controls.

In addition, the Federal Reserve expects a firm subject to Category I standards to subject 

benchmark models to validation, to the extent the models contribute to post-stress capital 

estimates. In contrast, a firm subject to Category II or III standards is not expected to use 

benchmark models in its capital planning process.

The Federal Reserve expects that the change control process of a firm subject to Category I 

standards would take into account recovery plans, whereas the Federal Reserve does not have 

this expectation for firms subject to Category II or III standards. 

Last, the Federal Reserve expects a firm subject to Category I standards to more clearly integrate 

the separate components of the capital planning process at the enterprise-wide level, as compared 

to a firm subject to Category II or III standards.

D. Capital Policy

A capital policy is a firm’s written assessment of the principles and guidelines used for 

capital planning, issuance, usage, and distributions.19 This includes internal post-stress capital 

goals (as discussed in more detail below and in Appendix F, “Estimating Impact on Capital 

Positions”) and real-time targeted capital levels; guidelines for dividend payments and stock 

repurchases; strategies for addressing potential capital shortfalls; and internal governance 

18 For additional information on supervisory expectations for internal audit see SR letter 13-1, “Supplemental Policy 

Statement on the Internal Audit Function and Its Outsourcing.”

19 12 CFR 225.8(d)(7).
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responsibilities and procedures for the capital policy. The capital policy must be approved by the 

firm’s board of directors or a designated committee of the board.20

The capital policy should be reevaluated at least annually and revised as necessary to 

address changes to the firm’s business strategy, risk appetite, organizational structure, 

governance structure, post-stress capital goals, real-time targeted capital levels, regulatory 

environment, and other factors potentially affecting the firm’s capital adequacy.

A capital policy should describe the firm’s capital adequacy decision-making process, 

including the decision-making process for common stock dividend payments or stock 

repurchases.

21 The policy should incorporate actionable protocols, including governance and 

escalation, in the event a post-stress capital goal, real-time targeted capital level, or other early 

warning metric is breached.

1. Post-Stress Capital Goals

A firm should establish post-stress capital goals that are aligned with its risk appetite and

risk profile, its ability to act as a financial intermediary in times of stress, and the expectations of 

internal and external stakeholders. Post-stress capital goals should be calibrated based on the

firm’s own internal analysis, independent of regulatory capital requirements, of the minimum 

level of post-stress capital the firm has deemed necessary to remain a going concern over the 

planning horizon. A firm should also determine targets for real-time capital ratios and capital 

levels that ensure that capital ratios and levels would not fall below the firm’s internal post-stress 

capital goals (including regulatory minimums) under stressful conditions at any point over the

planning horizon. For more details, see Appendix F, “Capital Policy.”

Differences in Expectations for firms subject to Category I standards ,

as compared to firms subject to Category II or III standards

The Federal Reserve expects the capital policy of a firm subject to Category I standards to cover 

a broader set of topics, including roles and responsibilities of key parties and metrics influencing 

capital distributions, than the capital policies of a firm subject to Category II or III standards. 

See Appendix F, “Capital Policy” for additional differentiated expectations for a firm’s capital 

policy.

20 12 CFR 225.8(e)(1)(iii).

21 Consistent with the Board’s November 14, 1985, Policy Statement on the Payment of Cash Dividends, the 

principles of which are incorporated into this guidance, firms should have comprehensive policies on dividend 

payments that clearly articulate the firm’s objectives and approaches for maintaining a strong capital position and 

achieving the objectives of the policy statement. See Bank Holding Company Supervision Manual, section 

2020.5.1.1, Intercompany Transactions (Dividends), available at: 

http://www.federalreserve.gov/boarddocs/supmanual/bhc/bhc.pdf.
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E. Incorporating Stressful Conditions and Events

As part of its capital planning process, a firm should incorporate appropriately stressful 

conditions and events that could adversely affect the firm’s capital adequacy into its capital 

planning. As part of its capital plan, a firm must use at least one scenario that stresses the specific 

vulnerabilities of the firm’s activities and associated risks, including those related to the 

company’s capital adequacy and financial condition.22

1. Scenario design

A firm should either develop a complete internal scenario or adjust the Federal Reserve’s 

supervisory scenarios for the specific vulnerabilities of the firm’s risk profile and operations, as 

needed, to appropriately capture the firm’s risks (see Appendix G, “Scenario Design”). 

2. Scenario narrative

A firm’s stress scenario should be supported by a brief narrative describing how the 

scenario addresses the firm’s particular material risks and vulnerabilities, and how the paths of 

the scenario variables relate to each other.

Differences in Expectations for firms subject to Category I standards,

as compared to firms subject to Category II or III standards

The Federal Reserve has elevated expectations for a firm subject to Category I standards relating 

to scenario design. Specifically, the Federal Reserve expects a firm subject to Category I 

standards to develop a scenario that is directly linked to the firm’s risk identification process and 

its risk assessment, and engage a broad range of stakeholders. In contrast, a firm subject to 

Category II or III standards is expected to either develop a firm-specific scenario or adjust the 

Federal Reserve’s scenario to reflect the firm’s own risk profile. 

In addition, a firm subject to Category I standards should use multiple firm-specific scenarios as 

part of its ongoing efforts to assess a broad range of risks, stressful conditions, or events that 

could impact the firm’s capital adequacy. A firm subject to Category II or III standards is not 

expected to use multiple firm-specific scenarios in its capital adequacy assessment.

Further, the Federal Reserve has higher expectations for the scenario narrative of a firm subject 

to Category I standards and expects these firms to articulate how risks not captured by scenario 

analysis are otherwise addressed in the capital planning process.

F. Estimating Impact on Capital Positions

A firm should employ estimation approaches that allow it to project the impact on capital 

positions of various types of stressful conditions and events. The firm’s stress testing practices 

should capture the potential increase in losses or decrease in pre-provision net revenue (PPNR) 

22 12 CFR 225.8(e)(2).
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that could result from the firm’s risks, exposures, and activities under stressful scenarios. A firm

should estimate losses, revenues, expenses, and capital using a sound method that relates 

macroeconomic and other risk drivers to its estimates. The firm should be able to identify the 

manner in which key variables, factors, and events in a scenario affect losses, revenue, expenses, 

and capital over the planning horizon. The firm may use simple approaches for their nonmaterial portfolios or business lines, such as application of loss or revenue rates during the prior 

stress periods or other conservative assumptions.

1. Loss estimation

A firm should provide support for the assumed relationship between risk drivers and 

losses. A firm is expected to estimate losses by type of business activity.

a. Credit risk losses on loans and securities

A firm should develop sound methods to estimate credit losses under stress that take into 

account the type and size of portfolios, risk characteristics, and data availability. A firm should 

understand the key characteristics of its loss estimation approach. In addition, a firm’s reserves 

for each quarter of the planning horizon, including the last quarter, should be sufficient to cover 

estimated loan losses consistent with generally accepted accounting standards.

A firm should test credit-sensitive securities for potential other-than-temporary 

impairment (OTTI) regardless of current impairment status. The threshold for determining OTTI 

for structured products should be based on cash-flow analysis and credit analysis of underlying 

obligors.

b. Operational-risk losses

A firm should maintain a sound process for estimating operational risk losses in its 

capital planning process. Operational losses can rise from various sources, including inadequate 

or failed internal processes, people, and systems, or from external events (see Appendix I, 

“Operational Loss Projections”).

2. PPNR

In projecting PPNR, a firm should take into account not only its current positions, but 

also how its activities, business strategy, and revenue drivers may evolve over time under the 

varying circumstances and operating environments. The firm should ensure that the various 

PPNR components, including net interest income, non-interest income and non-interest expense, 

and other key items projected by the firm such as balance sheet positions, RWA, and losses, are 

projected in a manner that is internally consistent. 

The ability to effectively project net interest income is dependent upon the firm’s ability 

to identify and aggregate current positions and their attributes; project future changes in accruing 

balances due to a variety of factors; and appropriately translate the impact of these factors and 

relevant interest rates into net interest income based on assumed conditions. Accordingly, a
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firm’s current portfolio of interest-bearing assets and liabilities should serve as the foundation for 

its forward-looking estimates of net interest income. 

Non-interest income is derived from a diverse set of sources, including fees and certain 

realized gains and losses. Non-interest income generally is more susceptible to rapid changes 

than net interest income, especially if certain market measures move sharply. A firm’s 

projections should incorporate material factors that could affect the generation of non-interest 

income under stress, including the firm’s business strategy, the competitive landscape, and 

changing regulations. 

Non-interest expenses include both expenses that are likely to vary with certain stressful 

conditions and those that are not. Projections of expenses that are closely linked to revenues or 

balances should vary with projected changes in revenue or balance sheet levels.

3. Aggregating Estimation Results 

A firm should have well-documented processes for projecting the size and composition of 

on- and off-balance sheet positions and RWAs over the planning horizon that feed in to the wider 

capital planning process (see Appendix H, “Risk-weighted Asset (RWA) Projections”).

A firm should have a consistently executed process for aggregating enterprise-wide stress 

test projections of losses, revenues, and expenses, including estimating on- and off-balance sheet 

exposures, and RWAs, and for calculating post-stress capital positions and ratios. The 

aggregation system should be able to bring together data and information across business lines, 

portfolios, and risk types and should include the data systems and sources, data reconciliation 

points, data quality checks, and appropriate internal control points to ensure accurate and 

consistent projection of financial data within enterprise-wide scenario analysis. Internal 

processes for aggregating projections from all relevant systems and regulatory templates should 

be identified and documented. In addition, the beginning points for projections and scenario 

variables should align with the end of the historical reference period. 

Differences in Expectations for firms subject to Category I standards,

as compared to firms subject to Category II and III standards

The Federal Reserve has elevated expectations for a firm subject to Category I standards 

regarding its use of models in loss and revenue estimation. As noted above, a firm subject to 

Category I standards is generally expected to use quantitative approaches in estimating losses 

and PPNR, whereas a firm subject to Category II or III standards may use either quantitative or 

qualitative approaches. In addition, a firm subject to Category I standards is expected to project 

losses and PPNR at a greater level of granularity and is held to higher expectations regarding 
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their estimations in other areas, including with respect to setting reserves, modeling operational 

risk, and identifying key risk drivers. 

In addition, a firm subject to Category I standards is held to expectations for estimation 

approaches for certain exposures, such as fair value option loans and market risks for trading 

exposures, that do not apply to a firm subject to Category II or III standards. 

See Appendix A, “Use of Models and Other Estimation Approaches,” for additional 

differentiated expectations for a firm’s estimation approaches.
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Appendix A: Use of Models and Other Estimation Approaches

Projections of losses and PPNR under various scenarios are key components of 

enterprise-wide stress testing and capital planning. The firm should ensure that its material 

projection approaches, including any specific processes or methodologies employed, are well 

supported, transparent, and repeatable over time. 

A firm may use either quantitative methods or qualitative approaches for generating 

projections. A firm is not expected to employ a sophisticated modeled approach, particularly if 

the firm can demonstrate that a simpler approach, combined with well-supported expert 

judgment, produces credible and transparent output. A firm can apply simple assumptions to 

generate losses or PPNR for its non-material portfolios or business lines.

A firm should adhere to supervisory guidance on model risk management (SR 11-7) 

when using models, and should have sound internal controls around both quantitative and 

qualitative approaches.

1. Quantitative Approaches

If a firm decides to employ quantitative approaches, it is not expected to use any specific 

quantitative estimation method. Any quantitative approach should be appropriate for the type and 

materiality of the portfolio or activity for which it is used and the granularity and length of 

available data. The firm should also ensure that the quantitative approach selected generates 

credible estimates that are consistent with assumed scenario conditions. A firm should separately 

estimate losses and PPNR for portfolios or business lines that are either sensitive to different risk 

drivers or sensitive to risk drivers in a markedly different way, particularly during periods of 

stress. 

a. Use of Data

A firm may use either internal or external data to estimate losses and PPNR as part of its 

enterprise-wide stress testing and capital planning practices.23 If a firm uses external data to 

estimate its losses or PPNR, the firm should ensure that the external data reasonably approximate 

underlying risk characteristics of the firm’s portfolios or business lines. Further, the firm should

make adjustments to estimation methods or outputs, as appropriate, to account for identified 

differences in risk characteristics and performance reflected in internal and external data. If 

internal data are not available, a firm should strive to collect internal data over time to augment 

its projections.

For material portfolios and business lines, a firm should generally include all available 

data in its analysis, unless the firm no longer engages in a line of business or its activities have 

changed such that the firm is no longer exposed to a particular risk. The firm should not 

23 Firms are required to collect and report a substantial amount of risk information to the Federal Reserve on FR Y14 schedules. These data may help to support the firms’ enterprise-wide stress test. See Capital Assessments and 

Stress Testing information collection, Reporting Forms FR Y-14A, Q, and M.
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selectively exclude data for material portfolios and business lines based on the changing nature 

of the ongoing business or activity without strong empirical support. For example, excluding 

certain loans only on the basis that they were underwritten to standards that no longer apply or 

on the basis that the loans were acquired by the firm is not sound practice.

b. Use of Vendor Models24

A firm should have processes to confirm that any vendor or other third-party models it 

uses are sound, appropriate for the given task, and implemented properly. A firm should clearly 

outline limitations and uncertainties associated with vendor models. 

2. Assessing Model Performance

A firm should use measures to assess model performance that are appropriate for the type 

of model being used. The firm should outline how each performance measure is evaluated and 

used. A firm should also assess the sensitivity of material model estimates to key assumptions 

(see Appendix D, “Sensitivity Analysis and Assumptions Management”). 

For models used for material portfolios and business lines, a firm should provide 

supporting information about the models to users of their output, including descriptions of

known measurement problems, simplifying assumptions, model limitations, or other ways in 

which the model exhibits weaknesses in capturing the relationships being modeled. Providing 

such qualitative information is critical when certain quantitative criteria or tests measuring model 

performance are lacking. 

3. Qualitative Approaches

A firm may use a qualitative approach to project losses and PPNR. When using a 

qualitative approach for material portfolios and business lines, the firm should substantiate 

assumptions and estimates using analysis of current and past risk drivers and performance, 

internal risk identification, forward-looking risk assessments, external analysis or other available 

information. The firm should conduct an initial and ongoing assessment of the performance and 

viability of the qualitative approach. The processes used in qualitative projection approaches 

should be transparent and repeatable. The firm should also clearly document material qualitative 

approaches and key assumptions used. 

Qualitative approaches should be subject to independent review, although the review may 

differ from the review of quantitative approaches or models. The level of independent review 

should be commensurate with:

• The materiality of the portfolio or business line for which the qualitative approach is 

used; 

• The impact of the approach’s output on the overall capital results; and 

• The complexity of the approach. 

24 See SR letter 13-19/CA 13-21, “Guidance on Managing Outsourcing Risk.”
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Firm staff conducting the independent review of the qualitative approaches should not be 

involved in developing, implementing or using the approach. However, this staff can be different 

than the staff that conducts validation of quantitative approaches or models. 

Differences in Expectations for firms subject to Category I standards,

as compared to firms subject to Category II or III standards

The Federal Reserve expects a firm subject to Category I standards to base their projections on 

internal data, include all available data in its analysis, and estimate losses and PPNR at a 

disaggregated level. In contrast, the Federal Reserve expects a firm subject to Category II or III 

standards to use either internal or external data in its projections, use all available data in 

analyzing material portfolios and business lines, and estimate losses and PPNR at a less granular 

level. 

In addition, the Federal Reserve has heightened expectations for a firm subject to Category I 

standards regarding the variable selection process, controls around the use of vendor models, and 

measures for assessing model performance. In addition, the Federal Reserve expects a firm 

subject to Category I standards to have strong controls related to all qualitative approaches, 

whereas the Federal Reserve holds a firm subject to Category II or III standards to this standard 

only with respect to material qualitative approaches.

See Section F, “Estimating Impact on Capital Positions,” of the core guidance document for 

additional differentiated expectations for a firm’s estimation approaches.
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Appendix B: Model Overlays

A firm may need to rely on overrides or adjustments to model output (model overlay) to 

compensate for model, data, or other known limitations.25 If well-supported, use of a model 

overlay can represent a sound practice.

A model overlay may be appropriate to address cases of identified weaknesses or 

limitations in the firm’s models that cannot be otherwise addressed, or for select portfolios that 

have unique risks that are not well captured by the model used for those exposures and 

activities.26 In contrast, a model overlay that functions as a general “catch all” buffer on top of 

targeted capital levels to account for model weaknesses generally would not represent sound 

practice.

27

As part of its overall documentation of methodologies used in stress testing, a firm should 

document its use of model overlays.

1. Process for Applying Overlays

A firm should establish a consistent firm-wide process for applying model overlays and 

for controls around model overlays. The process can vary by model type and portfolio, but 

should contain some key elements, as described below. This process should be outlined in the 

firm’s policies and procedures and include a specific exception process for the use of overlays 

that do not follow the firm’s standards. As part of model development, implementation and use, 

overlays for material portfolios and business lines should be well documented, supported and 

communicated to senior management. Model overlays should be applied in an appropriate, 

systematic, and transparent manner. Model results should also be reported to senior management 

with and without overlay adjustments. 

Model overlays (including those based solely on expert or management judgment) should 

be subject to validation or some other type of effective challenge.28 Consistent with the 

materiality principle in SR 11-7, the intensity of model risk management for overlays should be a 

function of the materiality of the model and overlay. A firm should make efforts to conduct 

effective challenge of its material overlays prior to their use in capital planning. If such 

25 For the purposes of this appendix, the term “overlays” will be used to cover overrides, overlays, or other 

adjustments applied to model output. Firms should follow expectations set forth in SR letter 11-7, “Supervisory 

Guidance on Model Risk Management,” relating to overlays.

26 Expectations for the use of judgment within model development is discussed in Appendix A, “Use of Models and 

Other Estimation Approaches.”

27 Firms may choose to apply overall capital buffers as an additional conservative measure, beyond overlays applied 

at the model level. Overall capital buffers should be subject to the same governance processes applicable to model 

overlays, as described in section 2 of this appendix. However, supervisors emphasize that having such a buffer 

should not in any way replace sound model risk management practices for overlays at the individual model level or 

address the need for the overlay at the individual model level. 

28 The term “effective challenge” means critical review by objective, informed parties who have the proper 

incentives, competence, and influence to challenge the model and its results.
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validation or effective challenge is not possible, those instances should be made transparent to 

users of the model and overlay.

Validation or other type of effective challenge of model overlays may differ from 

quantitative model validation. Staff responsible for effective challenge should not also be setting 

the overlay itself or providing significant input to the level or type of overlay. For example, a 

committee that develops an overlay should not also be responsible for the effective challenge of 

the overlay. In addition, staff engaging in the effective challenge of model overlays should meet 

supervisory expectations relating to incentives, competence, and influence (as outlined in 

SR 11-7). 

2. Governance of Overlays

Overlays and adjustments used by a firm should be reviewed and approved at a level 

within the organization commensurate with the materiality of that overlay or adjustment to 

overall pro forma results. In general, the purpose and impact of material overlays should be

communicated to senior management in a manner that facilitates an understanding of the issues

by the firm’s senior management. Material overlays to the model—either in isolation or in 

combination—should receive a heightened level of support and scrutiny, up to and including 

review by the firm’s board of directors (or a designated committee), in instances where the 

impact on pro forma results is material. 

Differences in Expectations for firms subject to Category I standards, 

as compared to firms subject to Category II or III standards

The Federal Reserve has elevated expectations for a firm subject to Category I standards

regarding its use of model overlays. The Federal Reserve expects a firm subject to Category I 

standards to use overlays in sparing and targeted manner, subject overlays to validation or 

effective challenge before use, and conduct sensitivity analysis on an overlay. In contrast, a firm 

subject to Category II or III standards may use overlays to a greater extent, should make an effort 

to validate or conduct effective challenge for material overlays before use, and is not expected to 

conduct sensitivity analysis on an overlay. 

In addition, the Federal Reserve expects a firm subject to Category I standards to have strong 

controls over all overlays, whereas the Federal Reserve holds a firm subject to Category II or III 

standards to this standard only with respect to material qualitative approaches. Last, the Federal 

Reserve has heightened expectations for firms subject to Category I standards relating to 

governance of overlays.
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Appendix C: Use of Benchmark Models in the Capital Planning Process

As noted in Appendix A, “Use of Models and Other Estimation Approaches,” a firm

should use a variety of methods to assess performance of material models and gain comfort with 

material model estimates. However, a firm is not expected to use benchmark models in its capital 

planning process.

Differences in Expectations for firms subject to Category I standards, 

as compared to firms subject to Category II or III standards

The Federal Reserve expects a firm subject to Category I standards to use benchmark models in 

capital planning; a firm subject to Category II or III standards is not held to this expectation.
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Appendix D: Sensitivity Analysis and Assumptions Management

A firm should understand the sensitivity of its stress testing estimates used in capital 

planning to the various inputs and assumptions. In addition, sensitivity analysis should be used to 

test the robustness of material quantitative approaches and models and enhance reporting to the 

firm’s senior management, board of directors, and supervisors. A firm should ensure that it 

identifies, documents, and manages the use of all key assumptions used in capital planning. 

1. Sensitivity Analysis

Understanding and documenting a range of potential outcomes provides insight into the 

inherent uncertainty and imprecision around pro forma results. A firm should assess the 

sensitivity of its estimates of capital ratios, losses, revenues, and RWAs to key assumptions and 

uncertainty across the entire firm’s projections under stress. Through this assessment, a firm 

should calculate a range of potential estimates based on changes to assumptions and inputs. 

A firm should also evaluate the sensitivity of material models to key assumptions to 

evaluate model performance, assess the appropriateness of assumptions, and understand 

uncertainty associated with model output.

Sensitivity analysis for capital planning models should be applied in a manner consistent 

with the expectations outlined in the Federal Reserve’s supervisory guidance on model risk 

management (refer to SR 11-7). Sensitivity analysis should be conducted during model 

development and during model validation to provide information about how models respond to 

changes in key inputs and assumptions, and how those models perform in stressful conditions. In 

addition, sensitivity analysis should be applied to understand the range of possible results from 

material vendor-provided models and vendor-provided scenario forecasts that have opaque or 

proprietary elements. Sensitivity analysis should be used to provide information to help users of 

model output interpret results, but does not have to result in changes to models or model outputs.

Changes made based on sensitivity analysis should be clearly documented and justified.

A firm should ensure that the key sensitivities are presented to senior management and 

the board in advance of decision-making around the firm’s capital plan and capital actions. 

Sensitivity analysis should also be used to inform senior management, and, as appropriate, the 

board of directors about the potential uncertainty associated with models employed of the firm’s 

projections under stress.

2. Assumptions Management

A firm should clearly document assumptions when estimating losses, PPNR, and balance 

sheet, and RWA components. Documentation should include the rationale and empirical support 

for assumptions and specifically address how those assumptions are consistent with and 

appropriate under the firm’s scenario conditions.

A firm’s rationale for assumptions used in capital planning should be consistent with the 

different effects of scenario conditions, shifts in portfolio mix, and growth or decline in balances 
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projected over the planning horizon. For example, the firm should scrutinize and support any 

assumptions about sizeable loan growth during a severe economic downturn. 

A firm should generally use conservative assumptions, particularly in areas of high 

uncertainty. The firm should provide greater support for assumptions that appear optimistic or 

otherwise appear to benefit the firm (such as loss reduction or revenue enhancement). A firm

should not assume that senior management will be able to realize favorable strategic actions that 

cannot be reasonably assured in stress scenarios given the high level of uncertainty around 

market conditions. Further, a firm should not assume that it would have the perfect foresight that 

would allow it, for example, to make significant expense reductions in the first quarter of the 

forecast horizon in anticipation of the forthcoming economic deterioration described in the 

scenario. 

A firm should confirm that key assumptions used in material vendor or other third-party 

products are transparent and have sufficient support before using the products in stress testing. 

The firm should limit use of material vendor products whose assumptions are not fully 

transparent or supported or use those products only in conjunction with another approach or 

compensating controls (e.g., overlays).

Differences in Expectations for firms subject to Category I standards,

as compared to firms subject to Category II or III standards

The Federal Reserve expects a firm subject to Category I standards to apply sensitivity analysis, 

including assumptions used in vendor models, to all approaches and assumptions used in capital 

planning. In contrast, a firm subject to Category II or III standards is expected to use sensitivity 

analysis only for material approaches and assumptions used in material vendor models.

In addition, the Federal Reserve expects a firm subject to Category I standards to subject a 

greater range of assumptions to sensitivity analysis and subject assumptions based on historical 

patterns to greater scrutiny.
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Appendix E: Role of the Internal Audit Function in the Capital Planning Process

A firm’s internal audit function should play a key role in evaluating the adequacy of the 

firm’s capital planning process and in assessing whether the risk management and internal 

control practices supporting that process are comprehensive and effective. A firm should 

establish an audit program around its capital planning process that is consistent with 

SR letter 13-1, “Supplemental Policy Statement on the Internal Audit Function and its 

Outsourcing.”

1. Responsibilities of Audit Function

The internal audit function should identify all auditable processes related to capital 

planning and develop an associated audit plan. The audit function should also perform 

substantive testing to ascertain the effectiveness of the control framework supporting the firm’s 

capital planning process, communicate identified limitations and deficiencies to senior 

management, and communicate material limitations and deficiencies to the board of directors (or 

the audit committee of the board). The audit function should comprehensively cover the firm’s 

capital planning process.

The internal audit function should perform periodic reviews of all aspects of the internal 

control framework supporting the capital planning process to ensure that all individual 

components as well as the entire process are functioning in accordance with supervisory 

expectations and the firm’s policies and procedures. The internal audit function should also 

review the manner in which deficiencies are identified, tracked, and remediated. Furthermore, 

the internal audit function should ensure appropriate independent review is occurring at various 

levels within the capital planning process.

A firm’s internal audit staff should have the appropriate competence and stature to 

identify and escalate key issues when necessary. The internal audit function may also rely on an 

independent third party external to the firm to complete some of the substantive testing as long as 

the internal audit function can demonstrate proper independence of the third-party from the area 

being assessed and provide oversight over the execution and quality of the work. 

2. Development of Audit Plan

The internal audit function should have a documented plan describing its strategy to 

assess the processes and controls supporting the firm’s capital planning process. When defining 

the annual audit universe and audit plan, the internal audit function of a firm should focus on the 

most significant risks relating to the capital planning process. The firm may leverage existing or 

regularly scheduled audits to ensure coverage of all the capital planning process components; 

however, the findings and conclusions of these audits should be incorporated into the overall 

summary of audit activities and conclusions regarding the firm’s capital planning process. 

3. Briefings to Senior Management and Board

On an annual basis, the internal audit function should report to senior management and 

the board of directors on the capital planning process to inform recommendations and decisions 
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on the firm’s capital plan. The report should provide an opinion of the capital planning process, a 

statement of the effectiveness of the controls and processes employed, a status update on 

previously identified issues and remediation plans, and any open issues or uncertainties related to 

the firm’s capital plan. Any key processes that are not comprehensively reviewed and tested, due 

to timing or significant changes in processes, should be clearly documented and identified as 

areas with potential heightened risk.

The internal audit function should track responses to its material findings and report to 

the board any cases in which senior management is not implementing required changes related to 

audit findings or is doing so with insufficient intensity. 

Differences in Expectations for firms subject to Category I standards,

as compared to firms subject to Category II or III standards

The expectations for internal audit at a firm subject to Category I standards are more specific and 

detailed than the expectations for a firm subject to Category II or III standards. For example, the 

internal audit function of a firm subject to Category I standards is expected to conduct a deeper, 

more detailed assessment of the firm’s model inventory, procedures for updating processes and 

change and version controls, adherence to documentation standards, operational systems, and 

work conducted by external parties. In addition, internal audit at a firm subject to Category I 

standards should have more explicit procedures for updating its audit plans. Last, a firm subject 

to Category I standards should brief the board of directors at least quarterly about key findings 

related to the capital planning process (in addition to the formal annual audit report, which is an 

expectation for a firm subject to Category I, II, or III standards). 
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Appendix F: Capital Policy

A firm’s capital policy should describe how the firm manages, monitors, and makes 

decisions regarding capital planning.29 The policy should include internal post-stress capital 

goals and real-time targeted capital levels; guidelines for dividends and stock repurchases; and 

strategies for addressing potential capital shortfalls. 

A firm’s capital policy should describe the manner in which consolidated estimates of 

capital positions are presented to senior management and the board of directors. The capital 

policy should require staff with responsibility for developing capital estimates to clearly identify 

and communicate to senior management and board of directors the key assumptions affecting 

various components that feed into the aggregate estimate of capital positions and ratios. The 

capital policy should require that aggregated results be directly compared against the firm’s 

stated post-stress capital goals, and that those comparisons are included within the standard 

reporting to senior management and the board of directors. 

1. Post-Stress Capital Goals

Post-stress capital goals should provide specific minimum thresholds for the level and 

composition of capital that the firm intends to maintain during a stress period. Post-stress capital 

goals should include any capital measures that are relevant to the firm.

The firm should be able to demonstrate through its own internal analysis, independently 

of regulatory capital requirements, that remaining at or above its internal post-stress capital goals 

will allow the firm to continue to operate.

The capital policy should describe how senior management and the board concluded that 

the firm’s post-stress capital goals are appropriate, sustainable in different conditions and 

environments, and consistent with its strategic objectives, business model, and capital plan. In 

addition, the capital policy should describe the process by which the firm establishes its poststress capital goals, and include the supporting analysis underpinning the goals chosen by the 

firm. 

A firm should annually review its capital goals, evaluate whether its post-stress capital 

goals are still appropriate based on changes in operating environment, business mix, or other 

conditions, and adjust those goals as needed.

A firm should adjust its real-time capital targets (that is the amount of current capital it 

holds above its post-stress capital goals to ensure it does not fall below those goals under stress) 

more frequently than it adjusts capital goals, based on changes in the business mix, operating 

environment or other current conditions and circumstances.

29 A capital policy is a firm’s written assessment of the principles and guidelines used for capital planning, issuance, 

usage, and distributions. 12 CFR 225.8(d)(7).
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2. Dividends and Stock Repurchases

A firm’s capital policy should describe the processes relating to common stock dividend 

and repurchase decisions, including the processes to determine the timing, form, and amount of 

all planned distributions. The capital policy should also specify the analysis and metrics that 

senior management and the board use to make capital distribution decisions. The analysis should 

include strategic considerations such as new business initiatives, potential acquisitions, and the 

other relevant factors.

3. Contingency Plans for Capital Shortfalls 

A firm’s capital policy should include specific capital contingency actions the firm would 

take to remedy any current or prospective deficiencies in its capital position. The firm’s capital 

contingency plan should reflect strategies for identifying and addressing potential capital 

shortfalls and specify circumstances under which the board of directors and senior management 

will revisit planned capital actions or otherwise institute contingency measures. A contingency 

plan should include a set of thresholds for metrics or events that provide early warning signs of 

capital deterioration and that trigger management action or scrutiny.30

Capital contingency plans should include options for actions that a firm would consider 

taking to remedy any current or prospective deficiencies in its capital position, such as reducing 

or ceasing capital distributions, raising additional capital, reducing risk, or employing other 

means to preserve existing capital. Contingency options in the firm’s capital policy should be 

consequential, realistic, actionable, and comprehensive. 

Differences in Expectations for firms subject to Category I standards, 

as compared to firms subject to Category II or III standards

The Federal Reserve expects a firm subject to Category I standards to include quantitative payout 

ratios in its distribution decision-making process, but does not have this expectation for a firm 

subject to Category II or III standards. The Federal Reserve also expects a firm subject to 

Category I standards to provide more support for its post-stress capital goals than a firm subject 

to Category II or III standards.

In addition, the Federal Reserve expects a firm subject to Category I standards to include 

additional detail on contingency options in its capital contingency plan and to integrate its capital 

contingency plan with the firm’s broader crisis management framework. In contrast, the Federal 

Reserve does not have these expectations for a firm subject to Category II or III standards.

See Section D, “Capital Policy” for additional differentiated expectations for a firm’s capital 

policy.

30 Capital contingency plans may include triggers for liquidity, earnings, debt and credit default swap spreads, 

ratings downgrades, stock performance, supervisory actions, general market stress, or other noncapital metrics.
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Appendix G: Scenario Design

As part of its capital plan, a firm must use at least one scenario that stresses the specific 

vulnerabilities of the firm’s risk profile and operations, including those related to the company’s 

capital adequacy and financial condition.31 The firm’s stress scenario should be at least as severe 

as the Federal Reserve’s severely adverse supervisory scenario, measured in terms of its effect 

on net income and other elements that affect capital.32

As noted in the core document, a firm should create its stress scenario, either by 

developing a complete internal scenario, or using the Federal Reserve’s supervisory scenarios, 

adjusted for the firm’s idiosyncratic risk profile.

The stress scenario should include stressful circumstances and events that could, on a 

standalone basis or in combination, reduce the firm’s capital levels and ratios and potentially 

impede the firm’s ability to operate as a going concern, and cover material risks to which the 

firm is exposed over the course of an annual planning cycle. A firm’s scenario should include 

factors that capture economy- or market-wide stresses and idiosyncratic risks that can put a strain 

on the firm. A firm should also take into account conditions and events that have not previously 

occurred, but that may pose a significant threat to the firm given its exposures, risk profile, and 

business strategy.

Differences in Expectations for firms subject to Category I standards, 

as compared to firm subject to Category II or III standards

The Federal Reserve has elevated expectations for a firm subject to Category I standards relating 

to scenario design. Specifically, a firm subject to Category I standards is expected to develop a 

scenario that is directly linked to the idiosyncratic risks of the firm, as determined by its risk 

identification process and risk assessment. In contrast, a firm subject to Category II or III 

standards is expected to either develop a firm-specific scenario or adjust the Federal Reserve’s 

scenario to reflect the firm’s own risk profile. 

In addition, a firm subject to Category I standards should use multiple internally-designed 

scenarios as part of its efforts to assess a broad range of risks, stressful conditions, or events that 

could impact the firm’s capital adequacy. A firm subject to Category II or III standards is not 

expected to use multiple scenarios in its capital planning process.

31 12 CFR 225.8(e)(2). In addition, a firm is required to report to the Federal Reserve its projections under a baseline 

scenario, which captures the firm’s view of the likely operating environment over the planning horizon. A firm may 

use the Board’s baseline scenario for its own baseline scenario if the firm can demonstrate that the Board’s baseline 

scenario is appropriate for the firm’s own risks, activities, and outlook; however, a firm cannot use the Board’s 

severely adverse scenario for its own stress scenario.

32 For guidance on the severity of the scenarios, a firm should review the Board’s “Policy Statement on the Scenario 

Design Framework for Stress Testing,” which sets forth the Board’s approach to designing the severely adverse 

scenario. See 12 CFR part 252, Appendix A.
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Appendix H: Risk-weighted Asset (RWA) Projections

A firm should maintain a sound process for projecting RWAs over the planning horizon. 

The firm’s initial and projected RWA calculations should be consistent with applicable 

regulatory capital requirements.

Starting balances for both on- and off-balance sheet exposures and applicable risk 

weights form the foundation for estimates of post-stress capital ratios. Therefore, firms should 

verify carefully the accuracy of these starting balances. Moreover, deficiencies in starting RWA 

calculations are generally compounded in RWA projections over the planning horizon. A firm 

should ensure that it has sound controls around its RWA calculation and regulatory reporting 

processes as part of the firm’s broader data governance program.

A firm should ensure that RWA projections are consistent with a given scenario and 

incorporate the impact of projected changes in exposure amounts and risk characteristics of onand off-balance sheet exposures under the scenario. A firm should demonstrate that assumptions 

associated with RWA projections are clearly conditioned on a given scenario and are consistent 

with stated internal and external business strategies. For example, the firm should demonstrate 

how projected credit RWAs over the planning horizon are related to projected loan growth under 

the scenario. A firm should provide documented evidence for the appropriateness of key 

assumptions used to project RWAs.

Differences in Expectations for firms subject to Category I standards, 

as compared to firms subject to Category II or III standards

The Federal Reserve has elevated expectations for a firm subject to Category I standards relating 

to RWAs projections. For instance, a firm subject to Category I standards should provide more 

detailed support and documentation for assumptions regarding RWA projections, and implement 

an independent review of RWA projections. In contrast, a firm subject to Category II or III 

standards is not held to the heightened expectations regarding RWA projections, and is not 

expected to implement an independent review of RWA projections.

In addition, this appendix sets forth expectations for market RWA projections, which would 

apply only to a firm subject to Category I standards.
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Appendix I: Operational Loss Projections

A firm faces a wide range of operational risk in conducting its business operations.

Operational losses can arise from various sources, including inadequate or failed internal 

processes, people, and systems, or from external events, and can differ in frequency and severity. 

For example, some operational loss events, such as credit card fraud, are often more predictable 

as they occur at high frequency, but generally have low loss severity. The outcome of other 

events, such as major litigation, are less certain and can result in outsized losses. 

Risk Identification Process

A firm should maintain a sound process for estimating operational risk losses in its 

capital planning process, taking into account the differences in loss characteristics of different 

operational loss event types. A firm’s risk identification process should include the evaluation of 

the type of operational risk loss events to which the firm is exposed and the sensitivity of those 

events to internal and external operating environments. The firm-specific scenario submitted in a 

firm’s capital plan should capture the firm’s material operational risks.

Approaches to Operational Loss Estimation

A firm can use a variety of estimation approaches to project operational losses for its 

enterprise-wide stress testing program, but should not rely on unstable or unintuitive correlations 

to project operational losses. The firm can use a simple, conservative approach based on 

historical loss data, such as applying average historical losses, or maximum historical losses, to 

project operational losses. A firm should also consider the use of scenario analysis to evaluate 

the effect of material operational risk events, especially those which are less certain or can result 

in outsized losses. 

Use of Data

The firm’s operational loss projection approaches should make appropriate use of 

relevant reference data. The firm should supplement its internal data with relevant external data 

if the internal data lacks sufficient operational loss history or granularity.

Differences in Expectations for firms subject to Category I standards,

as compared to firms subject to Category II or III standards

The Federal Reserve has elevated expectations for a firm subject to Category I standards relating 

to operational loss projections. For example, a firm subject to Category I standards should use 

scenario analysis in its operational loss projections, use both internal and external operational 

risk data, have greater support for its assumptions, and solicit input from senior management on 

operational risk events. In contrast, a firm subject to Category II or III standards is not expected 

to use scenario analysis, may use external data if internal data are lacking, and is not held to the 

same expectations related to assumptions or engagement with senior management.