Comprehensive Capital Analysis and Review 2012: Methodology and Results for Stress Scenario Projections

The Federal Reserve expects large, complex bank holding companies to hold sufficient capital in order to maintain access to funding, to continue to serve as credit intermediaries, to meet their obligations to creditors and counterparties, and to continue operations, even under adverse economic conditions. The Comprehensive Capital Analysis and Review (CCAR) is a supervisory assessment by the Federal Reserve of the capital planning processes and capital adequacy of these large, complex bank holding companies (BHCs). The CCAR is the Federal Reserve’s central mechanism for developing supervisory assessments of capital adequacy at these firms.

Nineteen BHCs were required to participate in this year’s CCAR (CCAR 2012).1  In early January, these BHCs submitted comprehensive capital plans to the Federal Reserve, describing their strategies for managing their capital over a nine-quarter planning horizon.  The purpose of requiring BHCs to develop and maintain these capital plans is to ensure that the institutions have robust, forward-looking capital planning processes that account for their unique risks and that the institutions have sufficient capital to continue operations throughout times of economic and financial market stress.  As part of its assessment of the plans, the Federal Reserve projected losses, revenues, expenses, and capital ratios for each of the 19 BHCs under a severely adverse macroeconomic scenario specified by the Federal Reserve.  This paper describes this scenario, provides an overview of the analytical framework and empirical methods used by the Federal Reserve to generate these stress scenario projections, and presents the results.

The projections provide a unique perspective on the robustness of the capital positions of these firms because they incorporate detailed information about the risk characteristics and business activities of each BHC and because they are estimated using a consistent approach across all of the BHCs.  The Federal Reserve is disclosing the stress scenario projections to enhance transparency about the capital of the 19 BHCs participating in the CCAR exercise.  The Federal Reserve also believes that providing information about both the results of the stress scenario projections and the methodology will provide useful context for market participants, analysts, academics, and others to interpret the results.  

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