CCAR Shows Sharper Focus on Bank Internal Models, Scenarios

Apr 07, 2014, 09:18 ET from Crisil Limited

MUMBAI, India, LONDON and NEW YORK, April 7, 2014 /PRNewswire/ --

CRISIL GR&A hosts webconference to discuss CCAR and other stress-testing regimes  

CRISIL Global Research & Analytics (GR&A), the world's largest and top-ranked provider of high-end research and analytics services, believes the results of the Federal Reserve's Comprehensive Capital Analysis and Review (CCAR) 2014 underscore the importance of robust internal models and scenarios to account for idiosyncratic risk exposures.

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The results also highlight how crucial the quantitative and qualitative components of the Fed's assessment are. Only one bank failed to meet the minimum quantitative criteria in CCAR 2014, while four couldn't meet expectations on qualitative aspects.

The Fed's quantitative assessment is based on a bank's ability to maintain a minimum Tier 1 common ratio of 5 per cent through 9 quarters while undertaking all bank capital actions. In addition, banks were required to meet Basel III minimum common equity Tier 1 ratios according to timelines for advanced and non-advanced approach banks.

The qualitative assessment as part of the CCAR process is an evaluation of the bank's overall capital planning process, including the robustness of risk identification, risk measurement, data aggregation and risk management practices as well as key assumptions and analysis underlying the capital plan.

At a recent webconference, CRISIL GR&A discussed CCAR and other stress-testing regimes with 50 senior-level participants including chief risk officers, heads of stress testing and other senior risk practitioners from leading US and European banks. Key themes emerging from the discussion included the fact that comprehensive pre-provision net revenue (PPNR) modelling and a reliance on internally generated scenarios are required to capture risk effectively in banks and to cope better with regulatory stress tests.

As regulatory stress tests have become more sophisticated there is an urgent need for banks to create internal models that are consistent with their capital planning processes. This is especially true of PPNR modelling. Gurpreet Chhatwal, Global Head of Risk and Analytics, CRISIL GR&A, says: "It is important for banks to develop their PPNR models with sufficient granularity to achieve integration with their balance sheet and credit projections so as to ensure success in the CCAR Stress tests."

CRISIL GR&A believes that the CCAR results could be an indicator of what to expect in the upcoming joint stress tests by the Prudential Regulatory Authority (PRA) of the UK and the European Banking Authority. In particular, both the Fed and the PRA require capital projections under supervisory scenarios created by the regulators and internally generated scenarios that are to include bank-specific idiosyncratic risks. Says Joshua Hancher, Senior Consultant, CRISIL GR&A: "The upcoming stress tests in the UKappear to incorporate lessons learnt from past CCAR exercises. This can be a positive for banks that have to deal with both the UKand US stress tests."

About CRISIL Limited 

CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services.

We are India's leading ratings agency. We are also the foremost provider of high-end research to the world's largest banks and leading corporations. With sustainable competitive advantage arising from our strong brand, unmatched credibility, market leadership across businesses, and large customer base, we deliver analysis, opinions, and solutions that make markets function better.

CRISIL's majority shareholder is Standard and Poor's(S&P).  Standard & Poor's, a part of McGraw Hill Financial, is the world's foremost provider of credit ratings.  

About CRISIL Global Research & Analytics 

CRISIL Global Research & Analytics (GR&A) is the world's largest and top-ranked provider of high-end research and analytics services. We are the world's largest provider of equity and credit research services. We are also the foremost provider of end-to-end risk and analytics services to trading and risk management functions at world's leading financial institutions and corporations. We operate from research centers in Argentina, China, India and Poland, working with our clients across several time zones and in multiple languages. Being part of CRISIL enables us to attract and retain top quality talent. We have over 2,300 employees, 75% of whom hold advanced degrees in finance, accounting and management. We employ the largest number of CFAs and CFA aspirants in India. We won top honors at the NASSCOM Exemplary Talent Practices Award (NExT Practices) for the second year in a row in 2012. The award recognizes us as a firm that has the vision to proactively invest in its people and get them future-ready. We are committed to delivering cutting-edge analysis, opinions, and solutions. This underscores our proposition of being the best people to work with.


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Last updated: May, 2013

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