Capital Planning in COVID-19 Economy – Closer Look on the U.S.
by Piotr Buzala
A featured article of our July 2020 edition of PRMIA's Intelligent Risk quarterly newsletter
In the aftermath of the 2008-2009 financial crisis, stress testing became a required business as usual exercise for the large U.S. banking institutions1. It is mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and is known as Comprehensive Capital Analysis and Review (CCAR) / Dodd-Frank Act Stress Test (DFAST). CCAR/DFAST test assumes both banks own internally designed (i.e. reflecting bank own and unique risk profile and vulnerabilities) and hypothetical developed by the Federal Reserve Board (FRB) macroeconomic and financial market scenarios and is built on projected revenues, expenses, reserves, and capital over the horizon of nine quarters. Scenarios are split into a “baseline” and a “severely adverse” types. This exercise ties the results of the test into the banks’ planned capital distribution actions and evaluates capital planning capabilities.
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