CCAR Benchmark 2020

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The Comprehensive Capital Analysis and Review (CCAR) is an annual exercise conducted under the supervision of the US Federal Reserve Board (FRB).

Its purpose is to assess financial robustness of bank holding companies (BHCs), which have been identified as economically significant to the US economy. The assessment looks at the capital adequacy under three different financial scenarios: baseline, adverse and severely adverse.

The 2020 benchmark

Due to the special circumstances caused by the global coronavirus (Covid-19) pandemic, The FRB announced a second CCAR submission would be required in 2020. So, to support our CCAR community further, ORX conducted a short follow-up study later to complement the full benchmark conducted earlier in 2020. We also continued hosting regular working group calls throughout 2020.

CCAR benchmark highlights (phase 1)

New firm categories highlight difference in approach

This year is the first cycle since the Federal Reserve Board (FRB) redefined the requirements for CCAR firms and set new categories for testing based on asset size and complexity. Broadly speaking, the level of bank asset size and complexity decreases from Category I to Category IV firms, and the requirements for submissions decrease as well. Because of this, notable differences in approach can be seen between the different categories – from modelling and forecasting through to the methods used in more qualitative activities, such as scenario analysis and material risk identification.

New top challenges faced this year

In previous years, we had observed top challenge areas identified in activities such as scenario analysis, engagement, or ongoing data issues. However, in this cycle there were three new top challenges which surpassed those from previous years’:

1. Timing and resources

2. Modelling

3. Macro-economic factors

Material risk identification and selection remains a focused challenge

Firms continue to work on identifying their material risks, as they recognize that it is critical to their overall risk management. It is also an area where the FRB pointed out deficiencies in practice. When it comes to selecting material risks to include in submissions, many firms struggle with their methodology. Although this area did not make the list of top three challenges, several firms commented that material risk identification and/or the selection of risks for inclusion is one of their top challenges, and is an area where they are seeking to improve.

Coronavirus impacts are still developing

At the time of the survey, most firms’ employees had just gone into lockdown and the impacts from a pandemic were “too soon to tell” for late adjustments to forecasts, or to create a scenario to include in submissions which were due in April. The realization that there would be impacts in the US from the global pandemic had come after most forecasts had been completed. Few firms included a pandemic scenario in their forecasts, and many of those who did commented that the impacts were likely not conservative enough to reflect what is now becoming current economic conditions.