First take: DFAST stress testing

March 2015

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Overview

For the first time all banks passed DFAST this year, but this unfortunately tells us nothing about their chances of passing next week's CCAR qualitative assessment

The DFAST results published yesterday are the Federal Reserve's (Fed) first stress test results released in 2015. On March 11th, the Fed will release the more important Comprehensive Capital Analysis and Review (CCAR) results which will tell us whether the banks passed the Fed's qualitative and quantitative assessments in order to return more capital to shareholders.

  1. All banks pass DFAST's classroom test; next week is CCAR's road test.

  2. More post-stress capital exists today than did pre-stress capital during the financial crisis.

  3. Industry capital ratios improve faster overall than at the largest banks.

  4. Leverage ratio appears binding for many large banks.

  5. High analyst capital payout expectations have likely caused a few banks to overshoot in their proposed capital actions.

  6. Fed models seem to be maturing and becoming more predictable.

  7. Loan loss rates improve due to fewer legacy problem portfolios and improved underwriting standards.

  8. Banks overall are positioned well under the adverse scenario's rising interest rate environment.

  9. Minimum capital ratios look worse than reality.

  10. DFAST (and CCAR) will likely be tougher in the future.

This First take elaborates on these key points.

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