Stress Testing & Capital Assessment

Our statistical and quantitative team offers stress testing and capital assessment services. We adopt methodologies from the fields of engineering and physics and work on projects independently or in collaboration with clients.

The history of the (CCAR) Comprehensive Capital Analysis and Review and (DFAST) Dodd-Frank Annual Stress Testing:

In response to the financial crisis and Great Recession of 2008 the United States Congress passed The Dodd-Frank Wall Street Reform and Consumer Protection Act which brought with it the most significant changes to financial regulation in more than 80 years. These new laws led to the Comprehensive Capital Analysis and Review (CCAR) program and Dodd Frank Annual Stress Testing (DFAST) reporting instructions.

CCAR is an annual capital adequacy exercise for major banks and financial institutions in the United States. Under the CCAR program, each year the Federal Reserve publishes different macroeconomic and financial scenarios to be applied in the stress test of the CCAR financial institutions. It is a forward-looking process as opposed to a snapshot of the business at a single point in time.

The two main objectives of the annual CCAR program for the bank holding companies (BHC) they monitor:

  1. Capital planning process that is robust, forward-looking and which considers the unique risks of each institution while insuring…
  2. Each holding company retains adequate capital reserves to continue operations in times of economic and financial stress.

The CCAR process assists the Federal Reserve to evaluate each BHC’s capital adequacy, internal capital adequacy assessment process, and their plans to make capital distributions (dividend payments or stock repurchases). This ongoing process allows for effective and ingrained enterprise-wide risk measurement and risk management practices and semi-continuous focus on identifying stress outcomes. This allows the senior management and board of directors to have strong oversight on the functioning of the enterprise.

While the mechanics of the processes are the same, DFAST stress testing is different than CCAR stress testing. DFAST is forward-looking and is performed by the Federal Reserve for financial institutions they regulate. It is performed to ensure these financial institutions have sufficient capital to absorb shocks, and remain a viable business during times of adverse economic conditions. DFAST stress testing is applicable to a broader set of financial institutions than the CCAR stress testing. DFAST stress testing is applicable to BHC’s, savings and loan companies, and state member banks with total assets greater than $10 billion, and other financial institutions that are designated to be supervised by the Federal Reserve.

Related Links