CCAR and DFAST Stress Testing Survey Insights
from Moody’s –
In 2015 Fed regulators intend to heighten expectations for the largest and most complex Bank Holding Companies . This is not surprising given the fact that these are the BHC’s with the largest potential impact on the U.S. financial system.
With the complexities of regulatory requirements, large banks are anticipating a major increase in their spending on stress testing. They generally estimate $10m per year in operating costs, with an additional technology cost of $30-$50m.
These were just a few of the insights gleaned from a recent survey of 39 CCAR and DFAST banks during roundtable discussions conducted by Moody’s Analytics.
Three major themes emerged from the series of stress testing discussions:
1. Management judgment versus quantitative modeling: There is uncertainty on when to build a model for a process that has traditionally been forecasted using management judgment.
2. Data: There is a pressing need to better manage the data used in the stress tests, including auditing, augmenting, and aggregating that data.
3. Getting more out of the stress testing exercise: With the amount of time, effort, and money being spent on stress testing, banks would clearly like to use the results for multiple purposes. For most banks, stress testing is still about regulatory compliance, rather than improving their business decisions and risk practices.
The larger banks all agreed that it is hard to determine what to do first, given the multiple regulations in multiple jurisdictions.
Improving infrastructure is desired, but the way forward is not always clear. Banks often lack well-defined roadmaps for longer term projects . The time pressure makes it difficult for them to move beyond regulatory compliance and leverage their stress testing investments to help run their businesses.
Priorities for 2015 Stress Testing
- Across 30 different banks, large and small, credit modeling was the top priority for improvement.
- Large and small banks ranked infrastructure, data, and process/workflow as important items.
- Documentation is becoming a top priority. Regulators are asking for more details and clearer explanations.
Fed Wants More Details and Better Documentation
Capital plans and model methodologies still lack detail, noted a member of the Federal Reserve Bank who spoke at the CCAR roundtable.
Most important, the overall emphasis will continue to shift from quantitative stress test results to qualitative capital plans. The Fed anticipates that there will be fewer quantitative failures during next year’s stress testing than qualitative failures, which was also the story in 2014.
Regulators have indicated they would like to see banks use stress testing for other purposes, like risk appetite definition, limits, and general risk management, but banks have indicated there is still a long way to go before they incorporate stress testing into these areas of their business.
In conclusion, Moody’s anticipates that investments in data, modeling, scenario design, and infrastructure will accelerate as banks seek to deliver more efficient and consistent responses to regulators and to maximize returns on their stress testing expenditures.