CCAR benchmark 2020
- 2 September 2020
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.
A new and developing factor in this year’s exercise is the global coronavirus pandemic, which just began to take shape in the US during the CCAR cycle. On June 25th, the FRB released the results of this year’s CCAR exercise. In addition to the results of the exercise based on the scenarios released earlier this year, the FRB also released a publication with details of a sensitivity analysis carried out in light of the pandemic.
FRB announces second CCAR submission
Included in the publication of this sensitivity analysis was an announcement that the FRB will shortly release new scenarios based on potential trajectories of economic recovery. Upon release of these new variables, participating banks will be required to update and resubmit CCAR within 45 days.
ORX extends this year's benchmark in response
Following the FRB's announcement, we've decided to hold a short follow-up study later this year and to continue hosting regular working group calls throughout 2020 to support our CCAR community with the challenges of an unprecedented second CCAR submission.
If your firm submits to CCAR and you want to be involved in this second phase of the ORX CCAR benchmark 2020, then please complete this form to register your interest. You don't need to have been involved in phase 1 to take part in the second stage of the project, and you don't need to an ORX member.
Phase 1 findings
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
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.
Second submission required by the Fed in short order
The FRB released the 2020 CCAR results at the end of June. This year, the FRB did not object to the submissions based on the stressed variables which were released to banks to test against in February 2020 – before coronavirus impacted the US. However, the FRB did recognize that the variables did not reflect what has become current economic conditions (i.e. unemployment rate, interest rates). As a result, they conducted their own sensitivity analysis which resulted in an unprecedented decision – that firms must resubmit CCAR again in 2020.
Take part in phase 2
We're conducting another shorter CCAR survey later this year, following the second submission to the Fed. All firms who are required to submit for CCAR are welcome to join (register here), and you don't need to have been involved in the project so far to sign up now. Take part in the project to:
- Receive a factsheet benchmarking the results of your April CCAR submission
- Join our active CCAR community for regular calls and webinars
- Take part in a second benchmark of the upcoming CCAR submission
- Get a copy of the overall CCAR 2020 trends report
- Join 25 firms participating at no extra cost to your membership
We will confirm the date of the second survey once the FRB have announced the deadline for the extra CCAR submission. This phase is open to members and non-members of ORX alike.