First take: CCAR stress testing

March 2015

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Overview

The 2015 stress test results published on March 11th as part of the Federal Reserve’s (“Fed”) CCAR follow last week’s release of Dodd-Frank Act Stress Test (“DFAST”) results. CCAR differs from DFAST by incorporating the 31 participating bank holding companies’ (“BHC” or “bank”) proposed capital actions and the Fed’s qualitative assessment of BHCs’ capital planning processes. The Fed objected to two foreign BHCs’ capital plans and one US BHC received a “conditional non-objection,” all due to qualitative issues.

  1. Capital planning process enhancements pay off.
  2. No amount of capital can make up for deficient processes.
  3. Return of the “conditional non-objection.”
  4. Large banks see little downside to taking the mulligan, so are being more aggressive with planned capital actions.
  5. Fed and BHC loan loss modeling differences are converging, but the gap remains wide.
  6. Fed asset growth projections continue to exert downward pressure on stressed Tier 1 common ratios.
  7. Caution signs line the road ahead for new CCAR entrants.
  8. Proving comprehensive risk identification will be one of the biggest challenges for CCAR 2016.
  9. Binding constraints on capital will evolve.
  10. CCAR is bigger than stress testing.

This First take elaborates on these key points.

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