In the 2014 CCAR results, the Federal Reserve rejected the plans of five of the 30 participating bank holding companies participating. The Comprehensive Capital Analysis and Review (CCAR) is an annual exercise by the Federal Reserve to assess capital sufficiency of the largest bank holding companies operating in the United States. The process evaluates whether the institutions have sufficient capital to continue operations throughout times of economic and financial stress and determine whether they have robust, forward-looking capital-planning processes that account for their unique risks.
In addition, a complimentary exercise to CCAR – Dodd-Frank Act Stress Testing (DFAST) – is a forward looking component conducted to help assess whether institutions have sufficient capital to absorb losses and support operations during adverse economic conditions. DFAST, applicable to all institutions with assets of $10 billion or more, and CCAR, applicable to the 30 largest institutions in 2014, is resource, staff and time intensive and continues to be the number one challenge facing financial risk managers in the US.
CFP recently surveyed over 50 risk professionals from across a variety of large, regional and new entrant FBO CCAR institutions to understand the critical challenges being faced with stress testing including the CCAR and DFAST process. Key challenges from the survey returned included scenario and model design challenges, PPNR forecasting and model risk. However, the number one challenge being faced by financial institutions undertaking CCAR and DFAST centered on data and data quality.
Institutions have a growing need to improve CCAR controls of data and improve the data quality. Without the data being of a sufficient and useable quality and consistency, difficulties lie throughout the process especially with building effective models where data is limited. There are increasing demands on data consolidation. In addition, irrespective of the models, personnel, conclusions and more, the quality and effective use of data is crucial to the success of the process.
Beyond data, there is a strong focus on maximizing the effectiveness of stress tests, being able to conduct these in a business as usual environment where value can be added to strategic planning and business decision-making. This feeds through to integration into risk appetite and effectively governing and communicating the process.
There is a growing interest for incorporating liquidity into the stress testing program and the linkage between capital stress testing and liquidity risk measures. With new liquidity measurements including the liquidity coverage ratio (LCR), greater guidance is required from regulators around how much integration there should between capital and liquidity stress testing and how to include the LCR.
Overall, the CCAR and DFAST processes are seen as time, staff and resource intensive. With a great demand and pressure to comply (including business impacts for not complying effectively) and run these processes each year, institutions need to move forward with adding value to the institution, influencing strategic and business decision making in a business as usual environment. Those that have gone through the process are finding the process challenging, while new entrants are also facing obstacles unlike those confronted previously.
CFP’s forthcoming 3rd Annual Stress Testing initiative will be addressing these and many more challenges with insights from the leading large, regional and new entrant FBO CCAR institutions.
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