Comprehensive Capital Analysis & Review

The Comprehensive Capital Analysis and Review (CCAR) is an annual exercise by the Federal Reserve to ensure that institutions have robust, forward-looking capital planning processes that account for their unique risks, plus sufficient capital to continue operations throughout times of economic and financial stress. As part of the CCAR, the Federal Reserve evaluates institutions’ capital adequacy, internal capital adequacy assessment processes, and their plans to make capital distributions such as dividend payments or stock repurchases. The CCAR includes a supervisory stress test to support the Federal Reserve’s analysis of the adequacy of firms’ capital. Boards of directors of the institutions are required each year to review and approve capital plans before submitting them to the Federal Reserve. A bank’s capability to absorb losses during stress periods is also a key focus of shareholders, potential investors, rating agencies, and credit analysts throughout the industry.

Stress testing is still an enormous challenge for even the largest banks.

A majority of banks across all asset sizes finds that stress testing is still a difficult and labor intensive exercise with significant room for improvement in both the processes and systems used. From pulling and cleaning data on the front end to aggregating the results and populating the templates, the processes and systems in place are inefficient, iterative, and lack integration and flexibility. Along with regulatory compliance, improving the efficiency of the bank’s stress testing program is a top goal. Most banks approached their inaugural stress testing exercise looking to limit their direct costs until they understood the reaction they would receive from regulators. What they discovered is that there are large direct and indirect costs associated with inefficient stress testing processes and systems. Banks that must spend significant resources just to complete regulatory stress tests frequently do not have the capacity to incorporate the stress testing results into their risk management activities and even less resources available to perform additional stress testing and scenario analysis based on their unique risk characteristics. If these banks are able to improve the efficiency of their stress testing, they will also be able to improve their risk management capabilities.

The lack of a coherent, integrated data system poses a major challenge.

Efficient data management at banks can prove to be daunting. A majority of banks’ data management systems are works in progress. Data pulls and cleanup on the front end are significant sources of inefficiency. While the importance of a smart, coherent data management strategy cannot be overstated, solving the data problem alone will not address a majority of the key issues causing problems for banks in their stress testing programs. Difficult activities such as aggregation, reconciliation and process consistency are a challenge because of the system architecture used to complete the stress test. Many banks have made extensive use of proprietary systems when stress testing requirements became a reality. While it was natural to leverage current systems as much as possible for the stress testing exercise, many of these older systems were not up to the task, causing as many challenges as they solve.

Centralized planning and management of stress testing can help efficiency.

Banks have taken a variety of approaches to managing their overall stress testing efforts. While banks find the process to be labor intensive and inefficient with much room for improvement, those that utilize a centralized approach to planning all stress testing activities in partnership with experts in CCAR find their processes to be most effective and efficient.

In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law requiring the Federal Reserve to conduct annual stress tests of bank holding companies with total consolidated assets of $50 billion or more. Passed as a response to the late-2008 recession, the Dodd-Frank Act brought the most significant changes to financial regulation in the United States since the regulatory reform that followed the Great Depression. It made changes in the American financial regulatory environment that affect all federal financial regulatory agencies and almost every part of the nation’s financial services industry.

Advance Warning System

Dodd-Frank’s primary objectives include taxpayer and investor protection, ending ”˜too-big-to-fail’ bailouts, and reducing the risk of a total collapse of the financial system.

The act has the following objectives:

Financial institutions of all sizes are affected: large bank holding companies, mid-size/regional banks, securities firms, fund managers, investment advisers, and insurance companies. Time for implementation is short and the regulations are complex. Institutions must do their research, understand the regulations and assess their impact before determining and implementing a strategy.

Gateway Partners has an expert team to help the largest financial institutions comply with Federal Reserve CCAR requirements by conducting model validation, economic capital modeling and remediation, corporate governance policies and training, and operational risk measurement and control. Given the repercussions for not meeting CCAR requirements, not utilizing the CCAR expertise of Gateway Partners is a risk you cannot afford to take.