Supervisory Review Readiness post CCAR March 2015 Results. A preliminary inspection of the CCAR Stress Test Results released by Federal Reserve Board on March 2015. Raises some questions that the BHCs management should be asking while reviewing CCAR results.

1. Supervisory Readiness for CCAR
Post 2015 Stress Test Results
Somanshu Jend
http://www.linkedin.com/in/sjend
March 2015
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2. What is CCAR?
 The Fed’s annual Comprehensive Capital Analysis and Review
(CCAR) is an intensive assessment of the capital adequacy of
large (Assets $10B+), ex U.S. bank holding companies (BHCs)
and of the practices these BHCs use to assess their capital
needs.
 The identified BHCs should have sufficient capital to
withstand a highly stressful operating environment and be
able to continue operations, ready access to funding, meet
obligations to creditors/ counterparties, and continue to
serve as credit intermediaries.
 See Stress Tests and Capital Planning,
http://www.federalreserve.gov/bankinforeg/stress-tests-
capital-planning.htm
March 2015
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3. CCAR Stress Test Scenarios
BHC must conduct a stress test using the following five
scenarios:
 3 provided by the Board under the Dodd-Frank Act stress
test rules
 Supervisory baseline
 Supervisory adverse
 Supervisory severely adverse
 2 BHC defined
 BHC baseline: a BHC-defined
 BHC stress: at least one BHC-defined
March 2015
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4. CCAR QUALITATIVE Review Guidelines:
Assessment of Capital Planning Process
 Strengthen Supervisory Review Of The Capital Adequacy
Processes For Risk
Governance/Identification/Assessment In Baseline Or
Severe Or Adversely Severe
 Assess Capital Needs Under Material Risks Should
Incorporate Reasonable/Appropriate Assumptions And
Analyses
 Improve The Methodology To Test The Capital Adequacy
Review Process To Make It Robust
 Capital Planning Process & Capital Distribution Process
Should Not Violate any Viability Test of BHCs under
Different Scenarios
March 2015
Somanshu JEND
www.linkedin.com/ini/sjend
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5. CCAR QUANTITATIVE Review Guidelines:
Assessment of Capital Planning Process
 After Taking The Capital Actions In Each Quarter Of The
Planning Horizon.
 Maintain Post Stress Tier I Common Capital Ration Above 5%
 Maintain Regulatory Capital Ration Above Applicable Minimum
 In The Supervisory Scenarios And BHCs’ Own Scenario
 Difference In CCAR And DFAST
 CCAR Adds The BHC’s Planned Capital Actions Onto The
Scenarios
 DFAST Uses The Standardized Scenarios Of Capital Action Using
The Same Level Capital Actions As Last Year
 FRB asked to Adjust Capital Distributions to Some BHCs and
Releases Both Stress Test Results (Before & After)
March 2015
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6. 2015 Stress Test Results*
http://www.federalreserve.gov/newsevents/press/bcreg/20150311a.htm
 All BHCs pass the first phase:
 3 BHCs told to alter Capital Spending Plans
 BHCs Stress Test 2nd Phase:
 2 BHCs Capital Spending plans rejected
 Four BHCs asked to resubmit Tier 1
 Federal Reserve requested that each BHC make supervisory process
documentation available that outlines the BHC's procedures to ensure
the accuracy of the regulatory reports that affect CCAR, including the FR
Y-9C and FR Y-14.
 BHC must reflect the Basel III-revised capital framework, and
 Include the minimum regulatory capital ratios and transition
arrangements
March 2015
Somanshu JEND
www.linkedin.com/ini/sjend
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7. 2015 Stress Test Results*
Reasons for Qualitative Objections to Specific BHCs’ Capital Plans
 Santander
 Weak Capital Planning Process & Weak Framework Supporting
Capital Planning Process
 Deutsche Bank
 Weak Process For Capital Planning And Stress Testing
 Deficiency In Risk-identification, Measurement, And Loss And
Revenue Projection Aggregation ; Issues with Internal
Controls.
 Bank of America
 Deficiency in the Capital Planning Process: Loss & Revenue
Modeling Internal Controls
 Re-Submit by Sep-2015
March 2015
Somanshu JEND
www.linkedin.com/ini/sjend
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8. 2015 Stress Test Results*
Reasons for Quantitative Objections to Specific BHCs’ Capital Plans
 No Quantitative Assessment Objections
March 2015
Somanshu JEND
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9. Ten Questions for Supervisory Review
to improve Qualitative Assessment
1. Supervisory Review: What is the Internal Control & Process Accuracy
Verification to generate CCAR, FR Y-9C and FR Y-14?
2. BHC Specific Tests: Does the Final Capital Plan, FR Y-9C and FR Y-14 pass
the common sense test for top-down allocations (Conceptually soundness
test) for Revenue Aggregation and Planned Capital Distribution?
3. Risk Identification and Measurement Process: What is the confidence level
that it would withstand CCAR and BHC specific stressful scenario?
4. MIS: How accurate is MIS? How accurate are the underlying data and
aggregation rules for Risk and Loss Modeling?
5. Assumptions & Analysis: Does accurate data provides accurate
metrics/measures? What are the differences in the underlying data and
derivation logic?
6. Loss & Revenue Aggregation: Does the underlying data have the same
Granularity, Congruity, Timeliness, logic across all the underlying models
at each entity level
March 2015
Somanshu JEND
www.linkedin.com/ini/sjend
9

10. Ten Questions for Supervisory Review
to improve Qualitative Assessment
1. Risk Governance: Is the Regulatory Process to collect and present the data
reliable and mature? How much of the process to calculate the Capital is
manual/automated?
2. Risk Governance: What is the validation for the Vendor model used? How
were the Proprietary models validated? What is the capital mix coming
from Vendor /Proprietary models?
3. Capital Planning Process: What is Known-Unknown in the Internal Control
Framework (Data Lag, Data Capture Issues, LOB (Entity/Sub-Entity/Group)
Allocation, Model Maturity/Seniority Rules, Internal Correlations, etc.)?
What are the efforts underway to correct the Control Framework?
4. Risk Governance: When can we make all these changes to the Internal
Control process for Regulatory Reporting? How Reliable is the Loss
Modeling Processes
5. Internal Control framework: What questions were raised during the Audit
Findings and Results Review
March 2015
Somanshu JEND
www.linkedin.com/ini/sjend
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11. References
 FR Y-14: Basel III and Dodd-Frank Schedule:
http://www.federalreserve.gov/reportforms/forms/FR_Y-14A20140930_i.pdf
 FR Y-14: Basel III and Dodd-Frank Schedule Instructions:
http://www.federalreserve.gov/reportforms/formsreview/FRY14A_20120118_f.pdf
 Guidelines for computing capital for incremental risk in the trading book (July 2009):
http://www.bis.org/publ/bcbs159.pdf
 Comprehensive Capital Analysis and Review 2015: Summary Instructions and Guidance
http://www.federalreserve.gov/bankinforeg/stress-tests/CCAR/2015-comprehensive-
capital-analysis-review-summary-instructions-guidance-intro.htm
 Comprehensive Capital Analysis and Review 2015: Assessment Framework and Results
http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20150311a1.pdf
March 2015
Somanshu JEND
www.linkedin.com/ini/sjend
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12. Disclosures
 All data and disclosures, used from the cited public sources, by the author’s and for
theoretical purposes only.
 No part can be used without written consent of the author.
 Please send questions to LinkedIn profile www.linkedin.com/in/sjend
March 2015
Somanshu JEND
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13. Appendix
March 2015
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14. Model inventory to Submit
 Present as per Summary Schedule (FR Y-14A) to Basel III
and Dodd-Frank Schedule Instructions (FR Y-14)
 Show Model inventory with each FR Y-14A line items (Income,
Balance Sheet & Capital, Retail, Wholesale, AFS/HTM
Securities, Trading, Counterparty Credit Risk (CCR),
Operational Risk, Pre‐Provision Net Revenue (PPNR))
March 2015
Somanshu JEND
www.linkedin.com/ini/sjend
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15. Common Themes
in the Required Model Documentations
 How do you determine the Regulatory Capital
 What are the main assumptions of the Capital calculation:
categorization and weighting formula
 Loss Calculations and Credit Loss Projections: Adverse
Events (future levels of bankruptcy filings, consumer
spending activity, refinancing rates, interest rate curves,
and relevant macroeconomic trends, historical Loss
relationships)
 Scenario Design & Application to FRB Scenario
March 2015
Somanshu JEND
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16. Common Themes
in the Required Model Documentations:
 Pricing Sources Consistency & Internal Pricing Model Validation
 Vendor/Proprietary Valuation & Cash Flow Model Consistency with
FRB scenarios
 Aggregation Methods adopted by LOB or Portfolio/Sub-Portfolio type
 Model Consistency across Business Lines for time horizons, valuation
logic, data sources & quality
 Assumptions in CCR IDR, Trading IDR, CVA Valuations and
Sensitivities, Probability of Default (PDs), Loss-Given Default (LGD)
 Operational Risk Events, Data Losses, Business/System Disruptions
March 2015
Somanshu JEND
www.linkedin.com/ini/sjend
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17. Other Important Exposures
 Risk-identification program documentation,
 Additional documentations for Credit Value Adjustments (CVA) Losses estimations for
Counterparty Credit Risk (CCR)
 Trading Incremental Default Risk (IDR) Losses for each CCR: Default risk for trading
losses beyond Mark-To-Market (MTM) losses
 Pre-Provision Net Revenue (PPNR) projections assumptions consistency with all
broad/Specific Macro-Economic Factors
 Risk-Weighted Assets Calculation Logic for
 Credit Risk: CVA calculations require a weighting factor to some assets. OTC
derivatives assets accounted three times
 Market Risk: Specific Risks and Correlations Trading get charged n full capital
 Leverage Exposure: On-Balance Sheet and Potential Future Exposure as
per Basel III guidelines
 Any Planned Actions impacting the Tier 1 Capital, RWAs and Leverage
Exposures
March 2015
Somanshu JEND
www.linkedin.com/ini/sjend
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