October 17, 2012 Disclaimer The views expressed in this - - PowerPoint PPT Presentation

CCAR: Current Regulator and Practitioner Perspectives

Wei Zhang, Ph.D, Federal Reserve Bank

• f Chicago

Robert G. Kula, EVP KeyCorp

October 17, 2012

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Disclaimer

The views expressed in this presentation are the authors’, and do not necessarily represent those of The Federal Reserve Bank of Chicago, or The Federal Reserve System, or Key Corp.

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Comprehensive Capital Analysis and Review

 The initial Federal Reserve System CCAR exercise was initiated in December 2010 and executed in early 2011  Had its roots in the 2009 Supervisory Capital Assessment Program (SCAP) exercise  CCAR 2, or CCAR 2012, encompassed the same 19 large banks as the first CCAR and original SCAP  Entailed submitting a detailed capital plan and extensive data schedules  Four scenarios: BHC-specific base and adverse scenarios, and supervisory base and adverse scenarios developed by the Federal Reserve

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Supervisory Review of Capital Plan

 Comprehensiveness of the capital plan  Reasonableness of the BHC’s assumptions and analysis  Robustness of capital adequacy process  BHC’s capital policy  BHC’s ability to maintain capital above regulatory minimums

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Supervisory Expectations for a Capital Adequacy Process: Seven Principles

• 1. Foundational Risk Management
• 2. Loss Estimation Methodologies
• 3. Capital Resource Estimation Methodologies
• 4. Assessing Capital Adequacy
• 5. Capital Planning & Capital Decisions
• 6. Internal Controls
• 7. Governance

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Principle 1: A BHC should have a sound risk management infrastructure that supports the identification, measurement, and assessment of all material risks arising from its exposure and business activities. Major Points:

 Risk identification process

• Comprehensive

 Risk measurement /

assessment

• Complete, accurate

 Data sufficiency / quality  Internal controls / data

integrity process

 Definition of materiality  Granular, loan level models  Expert judgment  Hard to quantify risks  Roles of functional groups,

risk committees, and the Board

 Connecting the outputs from

various models BHC focus/challenges:

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Principle 2: A BHC should have effective processes for translating risk measurements into estimates of potential losses over a range of adverse scenarios and environments and for aggregating those estimated losses across the BHC. Major Points:

 Tailored to bank exposures

and business activities

 Loss forecasts for all

material risk exposures

 Translation of scenarios  Transparency /

documentation of limitations

 Application of judgment to

risk measures & loss modeling All material risks and their interplay

 Consistent process across all

scenarios – starting with the fact set (model output)

 Models sensitive to macro

economic factors

 Understanding model

limitations

 Sound expert judgment that

can be quantified and reconciled BHC focus/challenges:

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Principle 3: A BHC should have a clear definition of available capital resources and an effective process for forecasting available capital resources (including any forecasted revenues) over the same range of adverse scenarios and environments used for loss forecasting. Major Points:

 Considering path of capital

resources over time

 Current portfolio mix vs.

future

 Transparency / support for

management judgment

 Consistency

• with balance sheet

assumptions

• across business units

 Modeling PPNR  Model documentation  Both “sources” and “uses”

• f Capital

 Absorption of losses in the

Base case vs. a Stress

 Risks not material in a Base

case may be material in a Stress BHC focus/challenges:

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Principle 4: A BHC should have processes for considering the impact

• f loss and resource estimates on capital adequacy, in line with the

BHC’s stated goals for the level and composition of capital, which take into account any limitations of the BHC’s capital adequacy process. Major Points:

 Capital adequacy metrics  Supplementary

measures/analysis

 Consideration of

limitations / weaknesses

 Capital buffer components  Governance/audit to ensure

accountability

 Capital policy  Capital buffers  Understanding limitations to

the process

 Reverse stress testing  Accuracy vs. conservatism  Bank’s models vs. the

Federal Reserve’s models BHC focus/challenges:

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Principle 5: A BHC should have a process, supported by its capital policy, to use its assessments of the impact of loss and resource estimates on capital adequacy to make decisions regarding the current level and composition of capital, specific capital actions, and capital contingency plans. Major Points:

 Comprehensive capital policy

framework

 Clearly articulated capital

goals and triggers/events that drive reconsideration of capital levels, distribution levels or other contingent actions

 Capital contingency plan  Robust capital policy  Detailed CCAR submission

– the capital plan and supporting materials

 Base case and Stress results

with and without proposed capital actions

 Contingency activities

BHC focus/challenges:

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Principle 6: A BHC should have robust internal controls governing its capital adequacy process components, including sufficient documentation, change control, model validation and independent review, and audit testing. Major Points:

 Documentation for CAP  Model risk / validation  Robust MIS  Audit review  Change Control Procedures  Procedures for making

qualitative adjustments to model output

 Model Risk Control –

independent model validations

 Documenting what you did

and what you thought

 Role of Risk Review/Audit

BHC focus/challenges:

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Principle 7: A BHC should have effective board and senior management oversight of the CAP, including periodic review of capital goals, assessment of the appropriateness of adverse scenarios considered in capital planning, regular review of any limitations and uncertainties in the process, and approval of planned capital actions. Major Points:

 Board of directors oversight  Senior management

responsibilities

 Credible challenge  Understanding limitations  Escalation procedures  Functional vs. Governance

activities

 Day to day management vs.

Oversight

 Formal approval process

BHC focus/challenges:

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Questions?