CCAR and the Paradox of Lower Losses

Three reasons to expect lower losses under the Fed's Severely Adverse scenario than those experienced during the Great Recession.

Analysis by Cristian DeRitis and Mustafa Ackay • April 16, 2014

Now in its fourth year, the bank stress-testing process prescribed by the Dodd-Frank Act continues to evolve. Data and reporting templates have been standardized along with the Federal Reserve’s process for creating economic scenarios. Banks have invested millions of dollars to upgrade their IT systems and beef up their risk oversight and modeling teams. As evidenced by the Fed’s 2014 Comprehensive Capital Analysis and Review report, most banks are now flush with capital as a result of shedding noncore assets and maintaining tight lending standards over the past four years. Now that bank finances and risk management are stronger and data are more reliable, we focus on the quantitative accuracy of the stress tests themselves and their reasonableness vis-à-vis the Great Recession experience......

Download the Full Article