Bank Stress Testing – CCAR, DFAST, and ICAAP

Day One

Introduction to Bank Stress Testing

• What is stress testing – capital vs liquidity stress testing?
• Motivation for stress testing – internal vs external supervisory and external investor purposes; bottom up vs top down. Stress tests as a comprehensive and fully integrated, quantitative health assessment of banks as distinct from partial CAMEL based approaches
• Role of stress testing in Comprehensive Capital Analysis and Review (CCAR); Dodd Frank Act Supervisory Stress Test (DFAST); Internal Capital Adequacy and Assessment Process (ICAAP); and Supervisory Review and Evaluation Procedure (SREP), as well as in business planning
• Building blocks of a bank stress test model – pre provision operating profits; loan loss and other asset provisioning; balance sheet; regulatory capital; linking the income statement, balance sheet, and regulatory capital models

Foundations

• Components of Federal Reserve’s annual assessment of large Bank Holding Companies (BHCs) – Comprehensive Capital Analysis and Review (CCAR); Dodd Frank Act Supervisory Stress Test (DFAST)
• In scope entities
• CCAR components and use of DFAST results – capital adequacy; capital planning process; planned capital distributions
• Mandatory elements of a capital plan
• CCAR qualitative assessment focus areas – governance; risk management; internal controls; capital policies; scenario design; projection methodologies

Case Study 1: Supervisory expectations of banks’ risk management framework and controls

Case Study 2: Linking macroeconomic and bank level variables

• DFAST framework – baseline, adverse and severely adverse scenarios; minimum stressed capital ratio requirements; planning horizon

Case Study 3: DFAST 2016 scenarios

• BHC data submission
• Scenario design framework for stress testing – macroeconomic and financial market variables

Case Study 4: Scenario design 2012 – 2016

Workshop 1: Econometric techniques for stress testing

• Multivariate ordinary least squares regression
• Markov processes
• Vector autoregression

DFAST Fed Modeling Methodology
Retail Lending

• Residential mortgages

Case Study 5: Probability of default (PD) model for first lien residential mortgages

Case Study 6: Loss Given Default (LGD) model for first lien residential mortgages

Case Study 7: PD model for HELOC residential mortgages

• Credit cards

Case Study 8: PD model for credit cards

• Auto

Case Study 9: PD model for auto loans

Case Study 10: LGD model for auto loans

• Other retail lending

Case Study 11: Net charge off model for small business loans

Case Study 12: Net charge off model for other consumer loans

Workshop 2: Modeling stressed retail loan losses for Bank of America Corporation

Day Two

Wholesale Lending

• Corporate

Case Study 13: PD change model for commercial and industrial loans

Case Study 14: LGD model for commercial and industrial (C&I) loans

• Commercial Real Estate (CRE) mortgages

Case Study 15: PD hazard rate model for CRE loans

Case Study 16: LGD model for CRE loans

Loans Held For Sale or Measured Under Fair Value Option

Case Study 17: Discount yield model for corporate and CRE loans

Case Study 18: Duration and spread model for retail loans

Securities Available For Sale and Held To Maturity

• Present value method
• Full revaluation
• Duration based approach

Trading Book

• Global market shock
• Credit valuation adjustment (CVA) losses

Counterparty Default

• Estimating impact of largest counterparty default

Case Study 19: Exposure, netting and collateral

• Operational Risk

Case Study 20: Panel regression model

Case Study 21: Historical simulation model

Workshop 3: Modeling stressed corporate loan losses for Bank of America Corporation, both C&I and CRE

Pre Provision Net Revenue

• Modeling interest income and interest expense
• Modeling non interest income
• Modeling non interest expenses

Balance Sheet and Risk Weighted Assets

• Fed’s industry wide loan and non loan asset growth model
• Applying Fed model to individual BHC
• Credit and market risk weighted asset projections

Regulatory Capital

• Linking to income statement, balance sheet and RWAs
• Transition arrangements

Workshop 4: Full capital stress test for Bank of America Corporation

• This workshop brings together all strands of a capital stress test for Bank of America, drawing on the components built in Workshops 2 and 3
• The stress test model can be used as a template for ICAAP/SREP purposes and for Dodd Frank Act company run stress tests performed under same macroeconomic assumptions as DFAST