CCAR/DFAST: Stress-testing in bank operations, strategic planning

Banks are integrating elements of regulatory stress-testing into their everyday business processes and their strategic planning exercises. In the process, they are optimizing their ERM.

The supervisory agencies — the Federal Reserve Board of Directors, the FDIC and the Office of the Comptroller of the Currency — oversee the two major stress-testing exercises. These exercises are commonly called the Comprehensive Capital Analysis and Review (CCAR) and the Dodd-Frank Act Stress Tests (DFAST). They are required for institutions with between $10 billion and $50 billion in total consolidated assets and those with over $50 billion in total consolidated assets.

Quality data management is critical to realistic stress-testing. With data workflows following prescribed processes, model development can be performed, and results aggregated into reports.

The results of stress-testing are a priority for:
  • Regulatory compliance
  • Cross-function integration
  • Financial planning
  • ERM

Regulatory compliance

One of the primary motivations for regulatory stress-testing is to ensure that financial institutions do not pose a threat to the stability of the banking system, specifically with respect to solvency conditions and capital adequacy. This regulatory mandate centers around a complex analysis that aims to estimate the impact of hypothetical macroeconomic scenarios on bank financial statements to project required capital.

Cross-function integration
Because regulatory stress-testing exercises require inputs from most bank functions, operational silos are transcended. The enterprise-wide effort offers the opportunity to implement and/or strengthen the institution’s ERM as an integrating framework, and to collaborate more effectively toward a common goal.

Financial planning
With stress-testing a component in financial planning, there is a potential for insights into optimal or suboptimal portfolio compositions, product features, customer segments and a multitude of other attributes based on worst-case scenarios. Some of these insights might not otherwise be afforded during standard financial planning.

Stress-testing is really one of the most significant reasons institutions are finally embracing some form of effective and practical ERM. Stress-testing is, after all, an exercise that touches core banking and risk functions most of all. In the current environment, organizations are beginning to develop new target operating models that comprehensively integrate risk across common lines of defense — operational management, internal monitoring and oversight, and internal audit.

Download the PDF for the full article; read about the multidimensional benefits available to financial institution operations and capital planning.

Transition from stress-testing initiatives to operationally sustainable infrastructures

Before beginning enterprise-wide stress-testing, assure that management understands the realities of syncing the efforts — most critically, in risk management. Watch the video for more information.