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How can banks keep ahead of CCAR wholesale loss modeling trends?

As trends emerge and supervisory expectations evolve, CCAR preferred practices point banks forward.

Overview

When conducting Comprehensive Capital Analysis and Review (CCAR) exercises, as large bank holding companies (BHCs) have done since 2011, providing financial adequacy is only part of the equation. The exercises also look at what BHCs are doing to make sure they will have sufficient capital. This includes building models, such as modeling wholesale credit loss.

A host of banks participate in CCAR exercises every year, including retail-centric firms, global investment banks and regional banks. All of them focus on wholesale or retail banking activities to at least some degree—and so, CCAR stress testing examines BHCs’ models for retail and wholesale lending, as well as trading.

Accenture’s newest paper, Top Considerations in Wholesale Credit Loss, explores trends and best practices around wholesale lending and CCAR credit loss modeling.

DOWNLOAD: TOP CONSIDERATIONS IN WHOLESALE CREDIT LOSS WITH CCAR MODEL DEVELOPMENT [PDF]


“Supervisors expect a CCAR model development framework with qualitative and quantitative components.”


Managing CCAR challenges

When it comes to their lending portfolios, BHCs have faced numerous challenges around CCAR stress testing. To build a solid CCAR wholesale loss model, BHCs need to consider these steps to address challenges:

  • Data considerations: If data is limited, regulators encourage temporary use of mapping from roughly comparable internal or external sources.

  • Segmentation approaches: How to segment portfolios at the appropriate level of granularity? Some banks segment portfolios into homogenous groups. Credit worthiness and various dimensions of risk can help in the segmenting process.

  • Methodologies for estimating loss: CCAR participants face particular challenges when estimating losses based on scenarios and the associated risk drivers. Choosing the right loss modeling methodology can make all the difference.

When it comes to choosing a model, many options are available, ranging from loan-level loss models and pool-level loss models to loss modeling by portfolio materiality and other choices. A host of factors come into play when working to identify the right modeling approaches.


“The selection of modeling methodology should satisfy a number of criteria.”



Preferred practices

Accenture’s experience working with BHC clients across the spectrum points to several preferred practices around CCAR. Some of these include:

  • Being proactive about the pace of regulatory change

  • Establishing a robust data governance framework

  • Appropriately balancing short-term projects with long-term initiatives

  • Documenting every detail of a wide range of business practices

  • Automating regulatory report generation

CCAR wholesale loss modeling is a complex activity, with emerging trends and supervisory expectations evolving. But action steps are available to banks participating in CCAR, with the potential to help them keep ahead of the wholesale loss modeling curve.

DOWNLOAD: TOP CONSIDERATIONS IN WHOLESALE CREDIT LOSS WITH CCAR MODEL DEVELOPMENT [PDF]

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