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LOGOContents
1. Introduction
2. Two Measures of Capital Adequacy
3. 2014 DFAST and CCAR Implementations
4. 2014 CCAR Requirement and Result Tables
LOGOIntroduction
Why the banks needed to be regulated? Banks issued subprime mortgages led to massive
default on mortgages Invented of derivatives to cover up toxic assets
Federal Reserve’s supervisory tools The Basel Models: Is it enough? New instruments: Comprehensive Capital Analysis
Review (CCAR) and Dodd-Frank Act Stress Test (DFAST)
LOGOTwo Measures of Capital Adequacy
The Basel Accords
The first regulatory method adopted by developed countries to measure bank holding companies’ (BHCs) capital ratios
Have been modified through time: Basel I, II, and III
LOGOThe Basel Accords
Basel I: Separated assets based on risk levels and divided the total capital – AKA Tier 1 Common Capital Ratio
• Banks needed to meet a standard of 4%• Set foundation for later models• Had weaknesses
Basel II: Revision on Basel I to cover loopholes
• Added in extra factors• 3 pillars: Minimum capital requirements;
Supervisory review; Market discipline.Basel III: Enhanced risk coverage, review
capital types and expanded risk coverage
LOGOTwo Measures of Capital Adequacy
The CCAR and DFAST
Financial institutions started to run internal stress tests since 1990’s • provided hypothetical adverse scenarios and see
if banks could remain insolvency The Fed Initiated Supervisory Capital
Assessment Program (SCAP) in 2009• 19 largest BHCs run mandatory stress tests under
supervisions of the Fed, OCC, and FDIC• Required to increase capital buffer if fail the test• Macroprudential supervision: government could
evaluate risk to the society as a whole
LOGOThe CCAR and DFAST (cont.)
Building on the SCAP, the Fed also ran annual stress tests as a complementary part of CCAR 3 economic scenarios (baseline, adverse, severely
adverse) Large BHCs also conducted semiannual stress tests
using own supplied scenarios Need to meet tier 1 common capital ratio of 5%
Submission of the proposed capital distribution plans Qualitative measure to ensure safe practices
Ability to meet Basel III requirements
LOGOThe CCAR and DFAST (cont.)
If BHCs fail to meet CCAR standards, the Fed would reject plan for capital distribution Shares Buying-back Issuance of dividends
Stress tests conducted in CCAR are different from DFAST!! DFAST includes mid-size BHCs ($10-50 billion
assets); while CCAR only included large BHCs DFAST use a standardized set of capital action
assumptions CCAR adjust capital level according to change of
common stock and dividend level
LOGOWhy is Stress Test Better?
The Basel models use historical data Under moderate growth assumption, even high level
of confidence would not help Stress test creates hypothetical scenarios
Basel models are static Use data on the balance sheets Stress test has longer time horizon
Other reasons Intentional reduction of portfolio Data mismeasurements
LOGOThe 2014 DFAST Result
All BHCs with total asset values over $10 billion had to participate
3 sets of scenarios (baseline, adverse, severely adverse)
A total of 28 variables: Interest rate, inflation, GDP growth, etc.
A time horizon of 9 quarters
LOGOThe 2014 DFAST Result (cont.)
Key changes: The Fed independently projected risk-weight assets
for each BHCs. Added in new capital ratios; changed risk levels in
each asset categories Disclose result under severely adverse scenarios
Results suggested a dramatic decrease of capital level under severely adverse scenario
LOGOThe 2014 CCAR Results
Covered 30 BHCs with assets over $50 billions
Quantitative and Qualitative Measures Rejected 5 capital plans; 3 of them were new to the
CCAR exercise 3 of the BHCs failed to meet capital requirement in
the stress test; needed to resubmit their capital action
The result revealed that the Fed consists high expectation and standard BHCs responded to increase capital buffer; capital
ratio doubled from 2009 to 2013