August 7, 2020

Mr. James Weatherly

Senior Vice President 

Capital One Financial Corporation

1680 Capital One Drive

McLean, VA 22102

Subject: Response to request for reconsideration of the stress capital buffer requirement, 

pursuant to the Board’s capital plan rule

Dear Mr. Weatherly:

This letter is in response to the request by Capital One Financial Corporation

(“COFC”) for reconsideration of the stress capital buffer requirement provided to COFC

by the Board on June 25, 2020. For the reasons stated below, the Board has affirmed the 

stress capital buffer requirement previously provided to COFC. In addition, with respect 

to the request by COFC for an informal hearing in connection with the request for 

reconsideration, the Board has not ordered an informal hearing.

I. Background

The Board’s capital plan rule1 establishes the Board’s process for determining the 

stress capital buffer requirement applicable to a firm subject to the capital plan rule. 

Pursuant to that rule, the Board generally will provide a firm with notice of its stress 

capital buffer requirement by June 30 of each year in which the firm submits an annual

capital plan.

2

 On June 25, 2020, the Board provided COFC with notice that its stress 

 1

 12 CFR 225.8.

2

 12 CFR 225.8(h)(1).
- 2 -

capital buffer requirement associated with its 2020 annual capital plan submission is 

5.6 percent.

3

The capital plan rule permits a firm to request reconsideration of the stress capital 

buffer requirement within 15 calendar days of receiving notice of the requirement.4 

COFC requested reconsideration of its stress capital buffer requirement on July 10, 2020.

A request for reconsideration may include a request for an informal hearing on the firm’s 

request for reconsideration.5

 COFC’s request for reconsideration included a request for 

an informal hearing. The capital plan rule generally provides that the Board will notify a 

firm of the Board’s decision to affirm or modify the firm’s stress capital buffer 

requirement within 30 calendar days of receipt of the firm’s request for reconsideration,

or within 30 days of the conclusion of an informal hearing regarding such a request.6

In each year in which a firm submits an annual capital plan, the Board generally 

will provide the firm with a final stress capital buffer requirement, as well as 

confirmation of the firm’s final planned capital distributions for that year, by August 31.7

Unless otherwise determined by the Board, the final planned capital distributions and 

final stress capital buffer requirement for a given year become effective October 1 of that 

year.

8

 A stress capital buffer requirement that becomes effective will remain effective 

until superseded.9

II. Stress Testing Framework

The stress capital buffer requirement is established based, in part, on the results of 

a supervisory stress test conducted by the Board. Specifically, a firm’s stress capital 

buffer requirement is the greater of 2.5 percent or the following calculation: (1) the 

difference between the firm’s starting and minimum projected common equity tier 1 

(CET1) capital ratios under the severely adverse scenario in the Board’s supervisory 

 3

 See email regarding 2020 CCAR Results (June 25, 2020).

4

 12 CFR 225.8(h)(2)(i) and (j)(2).

5

 12 CFR 225.8(h)(3)(ii).

6

 12 CFR 225.8(j)(5)(ii).

7

 12 CFR 225.8(h)(4)(i).

8

 12 CFR 225.8(h)(4)(ii)(A).

9

 12 CFR 225.8(h)(4)(ii)(B).
- 3 -

stress test plus (2) the sum of the dollar amount of the firm’s planned common stock

dividends for each of the fourth through seventh quarters of the planning horizon10 as a 

percentage of risk-weighted assets.

11 The stress capital buffer requirement provided to 

COFC on June 25, 2020, was calculated based on 2020 supervisory stress test results 

released by the Board.12

The results of the Board’s supervisory stress tests are projected using a set of 

models developed or selected by the Federal Reserve that take as inputs (1) the 

supervisory scenarios created by the Federal Reserve and (2) firm-provided data on the 

 10 The planning horizon is the period of at least nine consecutive quarters over which the 

relevant projections extend, beginning with the quarter preceding the quarter in which the 

firm submits its capital plan.

11 12 CFR 225.8(f)(2).

12 See Board of Governors of the Federal Reserve System, Dodd-Frank Act Stress Test 

2020: Supervisory Stress Test Results (June 2020), available at 

https://www.federalreserve.gov/publications/files/2020-dfast-results-20200625.pdf. On 

February 5, 2019, the Board released materials intended to increase the transparency of 

the stress testing program. 

See https://www.federalreserve.gov/newsevents/pressreleases/bcreg20190205a.htm. 

First, the Board updated the Policy Statement on the Scenario Design Framework for 

Stress Testing (“Scenario Policy Statement”) to provide additional information regarding 

the path of home price variables, in particular, reducing uncertainty about the path of 

these variables in the severely adverse scenario. Second, the Board adopted a final Stress 

Testing Policy Statement to provide additional information about the Board’s principles 

and policies with regard to the development and validation of supervisory stress test 

models. See 12 CFR part 252, Appendix A. As described in the Stress Testing Policy 

Statement, material changes to the supervisory stress test models are phased in over two 

years to reduce year-over-year volatility stemming from updates to the supervisory 

models. The Stress Testing Policy Statement defines a model change as highly material 

if its use results in a change in the CET1 ratio of 50 basis points or more for one or more 

firms, relative to the model used in prior years’ supervisory exercises. See 12 CFR 252, 

Appendix B 2.3. This approach contributes to the stability of the results of the 

supervisory stress test by ensuring that changes in model projections primarily reflect 

changes in underlying risk factors and scenarios, year over year. Third, the Board 

provided additional information about the models used in the supervisory stress test. See

84 Fed. Reg. 6784 (February 5, 2019). The Board is committed to continuing to provide 

additional information, including modeled loss rates by loan and borrower characteristics, 

about its stress test models, as it has done most recently for its corporate loan and credit 

card models.
- 4 -

firm’s financial condition and risk characteristics. To provide firms and the public with 

greater transparency regarding the Board’s process for designing supervisory scenarios 

for stress testing, in 2013 the Board finalized the Scenario Policy Statement.

Consistent with the principles described in the Stress Testing Policy Statement, 

the Federal Reserve designed the system of models so they would result in projections 

that are (1) from an independent supervisory perspective; (2) forward-looking; 

(3) consistent and comparable across covered companies; (4) generated from simple 

approaches, where appropriate; (5) robust and stable; (6) conservative; and (7) able to 

capture the effect of economic stress.13

The Federal Reserve’s models rely on detailed portfolio data provided by firms 

but generally do not rely on models or estimates provided by firms, consistent with the 

modeling principle that emphasizes an independent perspective.

The Federal Reserve generally develops its models under an industry-level 

approach that is calibrated using data from many financial institutions. This approach 

reflects modeling principles that favor models resulting in consistent, comparable, and 

forward-looking projections. The Federal Reserve models the response of specific 

portfolios and instruments to variations in macroeconomic and financial-scenario 

variables such that differences across firms are driven by differences in firm-specific 

input data, as opposed to differences in model parameters and specifications. As a result, 

two firms with the same portfolio receive the same results for that portfolio in the 

supervisory stress test, facilitating the comparability of results. In addition, the industrylevel approach promotes a forward-looking stress test, as it results in models that do not 

assume that historical patterns will necessarily continue into the future for individual 

firms. These policies also help to ensure that consistent and comparable supervisory 

models are forward-looking, robust, and stable.14

 13 See 12 CFR part 252, Appendix A.

14 While the Federal Reserve limits the use of firm-specific fixed effects and the use of 

dummy variables indicating a loan vintage or specific year, it makes exceptions where 

appropriate. For example, the Federal Reserve may use firm-specific indicator variables, 

firm-provided estimates, or third-party models or data in instances in which it is not 

possible or appropriate to create a supervisory model for use in the stress test, including 

when supervisory data are insufficient to support an independently modeled estimate of 

losses or revenues. However, the Federal Reserve does not adjust supervisory projections 

for individual firms or implement firm-specific overlays in the supervisory stress test. 
- 5 -

III. Discussion

As required by the Board’s capital plan rule, COFC’s request for reconsideration 

of its stress capital buffer requirement included a detailed explanation of why it contends 

that reconsideration should be granted.15 

To ensure that review of COFC’s request would be conducted with an 

independent perspective, a group of experts within the Federal Reserve System, who are 

independent of the staff who developed the models, analyzed the arguments made by 

COFC in favor of reconsideration of its stress capital buffer requirement.

16 With respect 

to each of the issues raised in the request of COFC, the experts considered whether the 

request identified any errors in the firm’s stress test results and whether each stress test 

model identified in the firm’s request is operating as intended, within the bounds of the 

Board’s published policies. The information in this letter regarding the Board’s stress 

testing policies and supervisory modeling practices was previously publicly disclosed, 

consistent with the Board’s practice to increase the transparency of the stress testing 

program.17

In its request, COFC asserts that its stress losses were higher than expected by 

$1 billion and that this amount should not have been included to the extent it was the 

result of the Federal Reserve’s calculation of deferred tax assets from net operating losses 

or the impact of COFC opting out of incorporating accumulated other comprehensive 

 

This policy ensures that the supervisory stress test results are determined solely by 

supervisory models and firm-specific input data. The Federal Reserve has instituted a 

policy of not using additional input data submitted by one or more of the covered 

companies unless comparable data can be collected from all the firms that have material 

exposure in a given area.

15 See 12 CFR 225.8(j)(3)(i).

16 This group is composed of staff members not involved in supervisory modeling and 

subject-matter experts from across the Federal Reserve System. This group’s model 

validation process includes reviews of model performance; conceptual soundness; and the 

processes, procedures, and controls used in model development, implementation, and the 

production of results. See Board of Governors of the Federal Reserve System, DoddFrank Act Stress Test 2020: Supervisory Stress Test Methodology at 7 (March 2020), 

available at https://www.federalreserve.gov/publications/files/2020-march-supervisorystress-test-methodology.pdf. 

17 See supra note 12.
- 6 -

income (“AOCI”) into regulatory capital following the effective date of the Board’s final 

tailoring rule.18 With respect to this argument, the Board has assessed COFC’s stress test 

results and Federal Reserve models for errors. Through this assessment, the Board did 

not identify any errors in COFC’s stress test results and has determined that the models 

operated as intended, within the bounds of the Board’s published policies.

As discussed above, COFC’s request for reconsideration included a request for an 

informal hearing. The Board has determined not to grant COFC’s request for an informal 

hearing regarding its request for reconsideration.19 The informal hearing process is 

intended to ensure that a firm is able to present its arguments to the Federal Reserve and 

to provide an opportunity for both the firm and the Federal Reserve to ask any questions 

regarding the request, including questions regarding disputed issues of material fact. 

Since the submission of COFC’s request, Federal Reserve staff has met with

representatives from COFC. The firm described its arguments for reconsideration in 

these meetings, and both the firm and Federal Reserve staff had the opportunity to ask 

questions. Federal Reserve staff also offered to hold additional meetings. In light of this 

process, the Board does not believe it is necessary to order an informal hearing regarding 

COFC’s request. 

The Board assessed its calculation of COFC’s stress losses and did not identify 

any errors in the calculation of COFC’s deferred tax assets from net operating losses or in 

the calculation of the impact of COFC opting out of incorporating AOCI into regulatory 

capital. In addition, the Board notes that the final tailoring rule allowed COFC to elect 

this opt-out, beginning in the first quarter of 2020. Accordingly, COFC’s regulatory 

capital as of the fourth quarter of 2019 included the impact of incorporating AOCI into its 

regulatory capital, and the adjustment was taken into account in the stress test in the first 

quarter of 2020, aligning with the treatment in the capital rule. This approach is 

consistent with the Board’s regulations on calculating a firm’s stress capital buffer 

requirement and also with the Board’s practice of calculating regulatory capital in the 

stress test consistent with the requirements that will be in effect during the projected 

quarter of the planning horizon.20 The Board has determined that it will follow its 

 18 See “Changes to Applicability Thresholds for Regulatory Capital and Liquidity 

Requirements,” 84 FR 59230 (November 1, 2019). 

19 See 12 CFR 225.8(j)(4)(i) (providing that the Board has sole discretion regarding 

whether to order an informal hearing).

20 See Dodd-Frank Act Stress Test 2020: Supervisory Stress Test Methodology at 57. 
- 7 -

published principles for stress testing with regard to the calculation of projected 

regulatory capital.

IV. Conclusion

After consideration of the Board’s stress testing policies and all relevant facts, 

including the information provided in the request, and consistent with the Board’s 

regulations, the Board has determined to affirm the stress capital buffer requirement 

provided to COFC on June 25, 2020. The final stress capital buffer requirement for 

COFC is 5.6 percent. The Board hereby confirms that the planned capital distributions

COFC submitted as part of its 2020 capital plan submitted on April 5, incorporating any 

adjustments made pursuant to 12 CFR 225.8(h)(2), are final. COFC’s final stress capital 

buffer requirement and final planned capital distributions are effective October 1, 2020.

The Federal Reserve supports banking organizations that choose to use their capital 

buffers to lend and undertake other supportive actions in a safe and sound manner.21 

When using their buffers, banking organizations may make capital distributions up to 

prescribed limits, which include automatic limitations in the capital framework, as well as 

any additional limitations determined by the Board.22 

Please contact Hillel Kipnis at (202) 452-2924 with any questions.

Sincerely yours,

Margaret M. Shanks

Deputy Secretary of the Board

 21 See Interagency Statement on the Use of Capital and Liquidity Buffers (March 17, 

2020), available at

https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200317a.htm. 

22 A “capital buffer” refers to capital held above regulatory minimum 

requirements. Banking organizations with regulatory capital ratios that are below their 

capital buffer requirement face gradual restrictions on capital distributions and 

discretionary bonus payments. See 12 CFR 217.11(c). These restrictions encourage 

banking organizations to conserve capital within the organization as they lend to 

households and businesses and as their capital levels approach minimum regulatory 

capital requirements. Capital buffers were designed to provide banking organizations 

with the means to support the economy in adverse situations and to allow banking 

organizations to continue to serve households and businesses. 
- 8 -

cc: Natalie Depasquale, Assistant Vice President

LaKisha Woods, Senior Manager

Federal Reserve Bank of Richmond