In addition to the stress scenario provided by the Federal Reserve, the six largest firms are also be required to estimate potential losses stemming from a hypothetical global market shock. The global market shock is based on market price movements comparable to the second half of 2008, with adjustments made to incorporate potential sharp market price movements in European sovereign and banking sectors.
In an effort to improve transparency and market discipline, after evaluating each institution’s submissions, the Federal Reserve will then publish the results of each firm’s supervisory stress tests, including the market shock results for the six institutions with large trading operations.
Capital Plans Rule Regulatory Implementation Timeline
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Bank holding company boards of directors and senior management will bear the ultimate responsibility for developing, implementing, and monitoring their firm’s capital planning strategies and internal capital adequacy process. The CCAR process clearly delineates this responsibility and ties any dividend increase or other capital distribution squarely on the BHC’s ability to satisfy its regulators of the adequacy and comprehensiveness of its capital planning process. The CCAR formally establishes common supervisory standards for large BHC capital planning and stress testing processes that large BHC’s will need to establish as business as usual practices going forward.
The Federal Reserve’s motivation is to attempt to avoid another 2008-style financial meltdown by forcing large BHC’s to hold sufficient capital to: maintain access to funding, continue to serve as credit intermediaries, meet their obligations to creditors and counterparties, and continue operations, even in an adverse environment.
While the stress tests are an important, public, and high-profile part of the CCAR process, the regulators will go further than this and will tie any perceived weakness in the BHC’s capital planning and/or capital adequacy process directly to the firm’s required level of capital, including dividends. Critical to this will be the regulators perceptions of the BHC’s risk-measurement and risk-management capabilities, including the perceptions that are created during routine safety and soundness examinations, including Basel-specific related examinations.
The Federal Reserve will consider the overall comprehensiveness of the capital planning process, including the BHCs' ability to capture, measure, and estimate potential losses under stressed scenarios, from all of its material risks stemming from all of its activities. They will assess the BHC's capital policies and procedures; the reasonableness of the assumptions and analysis supporting its capital adequacy assessment; its ability to maintain capital under stressful conditions; and the BHC’s degree of success in its implementing full compliance with Basel regulatory capital standards as they are implemented in the United States. The following table highlights some of the key capital planning expectations and considerations that boards of directors and senior management of the relevant BHC’s will want to make sure they’re properly able to address on an ongoing basis with their regulators.
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How Accenture Can Help – An Integrated Approach to Capital Planning
Successfully embedding capital planning into the bank holding company requires a common management framework driven top down from senior management that ensures that a robust and comprehensive capital planning process exists.
Integrating the capital plans rule and CCAR process into business as usual will require an enterprise wide approach to capital planning. Our detailed framework includes the following critical methodologies:
1. Identifying and Measuring Material Risks
Identify all material risks, risk mitigation techniques (including enforceability & effectiveness), diversifications & concentrations
Consider dependencies/contagion effects between risk types and effects of stress events to assumptions about portfolio and exposure behavior
Measure material risks quantitatively and qualitatively
Identify areas of uncertainty and bias in the risk measurement approach and reflect appropriate level of conservatism
Create a complete risk profile for the bank
2. Setting and Assessing Capital Adequacy Goals that Relate to Risk
Identify the appropriate measure of capital for capitalized risks
Evaluate capacity of bank’s capital to absorb different losses
Compare capital assessments to regulatory minimums, risk appetite, risk measures, volatility of capital requirements and other influences e.g. strategy, solvency standards, market/systemic events
Review capital needs through a defined cycle, considering downturn capital needs and capital raising lead times
3. Ensuring the Integrity of the Capital Planning Process
Ensure adequate validation, proper oversight, controls and documentation
Define processes for managing, monitoring, and refining the capital planning process through time
Identify deficiencies in current capital planning and create remediation actions
Ensure adequate engagement with the board of directors and senior management in development & review of the capital plan
Embed capital planning in business decision and risk management processes
How Stress Testing Fits in to the Capital Planning Process
While critical to get right, stress testing remains only a part of the overall capital planning process.
Our integrated approach to stress testing holistically assesses how internal and external events create capital impacts across multiple risk dimensions which, when combined, result in more realistic outcomes than those foreseen under a more silo-based approach.
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CCAR Capital Planning as Business as Usual
Accenture’s approach to capital planning can help transform the CCAR stress testing process from an exercise in regulatory compliance into a value-enhancing capability, where risk management is used as a competitive differentiator to:
Align business strategy and risk capabilities to evaluate market options and drive profitable growth
Embed risk management capabilities across the organization to support a risk conscious capital planning process
Adapt to industry and geographic regulations in a holistic manner while focusing on business impacts and outcomes
Provide the capabilities to collect, model and analyze business information for better risk-based capital planning
Key to creating this value enhancing capability is to ensure that the CCAR capital planning process becomes part of the firm’s business as usual.
By turning the CCAR process from an annual exercise in regulatory compliance into a regular and important part of the company’s capital planning process, BHC’s can transform what would seem to be yet just another purely regulatory burden into a value generating proposition that helps mitigate risk while helping to drive shareholder value.
References and Further Reading
1. Federal Reserve Press Release and Relevant Attachments
2. Capital Plans Amendment to Regulation Y
About the Author
Jamie Marsh is an executive in Accenture’s risk management practice and has over 20 years of financial services experience, including as a bank examiner at the Federal Reserve Bank of Boston and at SunGard Brokerage Systems and Fidelity Investments. He has received his CFA charter and Certified Investment and Fiduciary Risk designation and received his Masters in Finance from Brandeis University.
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This blog is produced by Accenture as general information on the subject. It is not intended to provide advice on your specific circumstances. If you require advice or further details on any matters referred to, please contact Accenture. Accenture disclaims, to the fullest extent permitted by applicable law, any and all liability for the accuracy and completeness of the information in this document and for any acts or omissions made based on such information.
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