August 7, 2020

Mr. Bruce Van Saun

Chief Executive Officer

Citizens Financial Group, Inc.

One Citizens Plaza

Providence, RI 02903

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

pursuant to the Board’s capital plan rule

Dear Mr. Van Saun:

This letter is in response to the request by Citizens Financial Group, Inc. (“CFG”)

for reconsideration of the stress capital buffer requirement provided to CFG by the Board 

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

buffer requirement previously provided to CFG.

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 CFG with notice that its stress 

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

3.4 percent.

3

 1

 12 CFR 225.8.

2

 12 CFR 225.8(h)(1).

3

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

requested reconsideration of its stress capital buffer requirement on July 10, 2020. 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.5

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 31.6

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

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

that year.

7

 A stress capital buffer requirement that becomes effective will remain 

effective until superseded.8

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 

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 horizon9 as a 

 4

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

5

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

6

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

7

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

8

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

9

 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.
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percentage of risk-weighted assets.

10 The stress capital buffer requirement provided to 

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

released by the Board.11

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 

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. 

 10 12 CFR 225.8(f)(2).

11 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.
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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.12

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.13

 12 See 12 CFR part 252, Appendix A.

13 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. 

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 
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III. Discussion

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

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

that reconsideration should be granted.14 

To ensure that review of CFG’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 CFG in favor of 

reconsideration of its stress capital buffer requirement.

15 With respect to each of the 

issues raised in the request of CFG, 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.16

In its request for reconsideration of its stress capital buffer requirement, CFG 

presents five arguments: (1) its pre-provision net revenue (“PPNR”) was understated due 

to model phase-in; (2) its PPNR was understated due to incorporation of historical 

performance prior to 2014; (3) its retail losses in other consumer portfolios were 

overstated due to lack of recognition for loss-sharing agreements; (4) its home equity 

lines of credit (“HELOC”) losses were overstated due to lack of recognition of lien status; 

and (5) its provision expense was overstated relative to losses. With respect to each of 

 

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

exposure in a given area.

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

15 This group is composed of staff members not involved in supervisory modeling, 

supplemented by 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, Dodd-Frank Act Stress Test 2020: Supervisory Stress Test Methodology

at 7 (March 2020), available at https://www.federalreserve.gov/publications/files/2020-

march-supervisory-stress-test-methodology.pdf. 

16 See supra note 11.
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these arguments, the Board has assessed CFG’s stress test results and Federal Reserve 

models for errors. Through this assessment, the Board did not identify any errors in 

CFG’s stress test results and has determined that the models operated as intended, within 

the bounds of the Board’s published policies.

1. PPNR Model Phase-In

First, CFG cited concerns that the Board’s PPNR model does not properly 

account for the changes to its business after its IPO in 2014, when it was spun off from 

the Royal Bank of Scotland.17 CFG asserted that the Board should immediately phase in 

the recent PPNR model change, which increases the importance of firm performance in 

more recent years, in order to more precisely capture the firm’s recent PPNR 

improvements in the post-IPO period relative to its peers. 

The Stress Testing Policy Statement provides that material model changes will be 

phased in over two years in order to minimize the volatility impact of the model 

change.18 The phased-in change to the PPNR model applies greater weight to a firm’s 

most recent performance and is more reflective of the current entity. The Board’s 

policies on material model changes are meant to reduce aggregate volatility in the stress 

test results. For these reasons, in response to this argument, the Board is following the 

standards in its Stress Testing Policy Statement to phase in material model changes. 

2. Incorporation of Historical Performance Prior to 2014

Second, CFG contends that the Board should adjust the PPNR model to 

overweight the firm’s recent PPNR improvements, including those related to its strategic 

acquisitions. The PPNR model is designed to reflect a long time horizon for a firm’s 

PPNR in accordance with the principle of robustness and stability.

19 Accordingly, in 

 17 In particular, the firm cites improved recent performance. The firm’s average PPNR 

has grown from 2.7 percent of assets from 2010 to 2015 to 3.4 percent of assets from 

2016 to 2019. In addition, relative to the recent COVID market disruption, CFG’s 

projected PPNR in the 2020 supervisory stress test is 2.3 percent of assets, while actual 

PPNR during the first six months of 2020 was 3.7 percent of assets.

18 12 CFR part 252, Appendix B 2.3.

19 The Federal Reserve maintains supervisory models that aim to be robust and stable, 

such that changes in model projections over time reflect underlying risk factors, 
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response to this argument, the Board is following its methodology for estimating 

revenues in the PPNR model.

3. Loss-Sharing Agreements

Third, CFG asserts that the Board does not fully account for contractual losssharing agreements in the firm’s merchant loan portfolio. Although the current model 

does not account for loss-sharing agreements, the modeling approach is in line with the 

Stress Testing Policy Statement’s principles of consistency and comparability, simplicity, 

and adoption of industry-level projections.20 In particular, the model is appropriate given 

the portfolios of these types of loans across the industry. Accordingly, the Board is 

following its stated methodology for estimating losses with respect to loss-sharing 

arrangements in retail installment loans.

4. HELOC

Fourth, CFG asserts that the estimated HELOC losses do not explicitly recognize 

the strength of first lien HELOCs, and that the firm has a higher proportion of loans that 

are first lien than other firms, but higher losses. The Board investigated the firm’s 

assertion and determined that there was no error or methodological issue with the Board’s 

modeling approach, which recognizes and projects loan and borrower characteristics. 

Accordingly, the Board is following its existing methodology for estimating losses 

associated with HELOC.

5. Provision Expense

Finally, CFG argues that its projected provision expense is higher than that of its 

peers despite credit losses being equal to those of its peers. Provisions can vary for a 

given amount of losses, reflecting the difference in timing between the recognition of 

expected losses and that of charge-offs. The Board investigated the firm’s assertion and 

determined that there was no error or issue with the Board’s modeling approach. The 

Board is following its stated methodology for estimating provisions.21

 

scenarios, and model enhancements, rather than transitory factors. 12 CFR part 252, 

Appendix B 1.5.

20 See 12 CFR part 252, Appendix B 1.3, 1.4, and 2.4.

21 Specifically, as described in the stress test methodology document, “[f]or loan types 

modeled in a charge-off framework, the Board adjusts the appropriate level of the 
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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 CFG on June 25, 2020. The Board notes that it is focused on continuously 

improving the stress testing framework, including the Board’s supervisory models. With 

regard to the arguments raised by CFG in the request for reconsideration, the Board has 

directed Federal Reserve staff to investigate and address, as appropriate, the treatment of 

loss-sharing agreements in certain retail models to see if any future improvements can be 

made. In addition, the Board has directed Federal Reserve staff to explore potential 

improvements through the use of more recent data for purposes of PPNR model 

development and estimation. In evaluating any of its supervisory models, the Board 

follows the processes for development, implementation, and validation of its supervisory 

models as outlined in the Board’s Stress Testing Policy Statement.

The final stress capital buffer requirement for CFG is 3.4 percent. The Board 

hereby confirms that the planned capital distributions CFG 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. CFG’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.22 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.23 

 

allowance to reflect the difference in timing between the recognition of expected losses 

and that of charge-offs.” Dodd-Frank Act Stress Test 2020: Supervisory Stress Test 

Methodology at 44, n. 63.

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

2020), available at 

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

23 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 
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Please contact Hillel Kipnis at (202) 452-2924 with any questions.

Sincerely yours,

Margaret McCloskey Shanks

Deputy Secretary of the Board

cc: Theresa Barry, Vice President

Kim Husson, Assistant Vice President

Mark Brassard, Central Point of Contact

Federal Reserve Bank of Boston

Harriet Clubb, Manager

John Colwell, Principal Project Manager

Federal Reserve Board

 

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 allow to banking 

organizations to continue to serve households and businesses.