Why might tailored models for Comprehensive Capital Adequacy Review (CCAR) be increasingly important for capital markets financial players?
Since 2011, bank holding companies with $50 billion or more in assets have had to participate in CCAR, a US regulatory requirement. Until now, most CCAR emphasis has been on credit portfolios—but that’s about to change. Trading book, investment banking and wealth management businesses are seeing increased CCAR focus, with challenging implications for capital markets businesses.
Given the differences in revenue swings capital markets firms experience, CCAR models may need specific tailoring to best support these firms.
An integrated CCAR framework, we find, centers around four key components: strategic planning and risk appetite, risk management, balance sheet management and capital management. Businesses succeed when they pursue continuous alignment and regularly re-balance across balance sheet, risk and capital decisions.
But how can this be achieved? In our view, a proactive approach is appropriate.
A number of factors are worth considering when building a CCAR model for capital markets:
CCAR priorities and needs can evolve over time.
A good approach integrates risk and strategy, aligning risk policies with business strategy.
Supervisory developments, such as Supervisory Letters SR 15-18 and SR 15-19, recently released by the Federal Reserve have served to differentiate expectations, responding to “one size fits all” criticism.
When capital markets firms begin building their CCAR modeling tools, we recommend they consider these unique aspects for capital markets businesses:
Pre-provision net revenue projections for non-interest revenue hold greater importance for wealth managers than for banks with traditional business lines.
Anticipated changes in business strategy are more critical to account for among capital markets firms.
Macro factors are highly useful for capital markets businesses to help balance business drivers and underlying risk factors.
Multi-tiered modeling may be needed for capital markets firms.
Capital markets firms face more complex challenges around forecasting trading and sales schedules.
Our report provides an in-depth look at these considerations, and offers recommendations that can help capital markets businesses build highly effective CCAR models.