Stress Testing Convergence

19 Pages Posted: 29 Jul 2015

See all articles by German Gutierrez Gallardo

German Gutierrez Gallardo

New York University (NYU) - Leonard N. Stern School of Business, Students

Til Schuermann

Oliver Wyman

Michael Duane

Oliver Wyman

Date Written: July 28, 2015

Abstract

This year, 2015, marks the six-year anniversary of US regulatory stress testing. We observe three key trends: 1) Increasingly aggressive capital management: Banks initially responded to CCAR by maintaining wide capital cushions vs. regulatory minimums. However, as CCAR processes stabilize and capital minimums increase, some institutions appear to be managing capital more and more tightly, especially investment banks, universals and custodians. 2) Drivers of enhanced financial resource management: What allows institutions to manage capital more closely? First, stress test results are beginning to stabilize and, in some cases, converge. Second, although we have just a handful of examples, the market seems to reward aggressive capital requests, even if they are, at first, rejected by the Fed. 3) Unintended consequences: As stress test results converge and institutions begin to manage capital to Fed-projected results, the Fed’s stress testing models become an increasingly important driver of the fate of the financial system.

Keywords: risk management, capital requirements, CCAR, systemic risk, bank performance

JEL Classification: G21, G28, G32

Suggested Citation

Gutierrez Gallardo, German and Schuermann, Til and Duane, Michael, Stress Testing Convergence (July 28, 2015). Available at SSRN: https://ssrn.com/abstract=2636984 or http://dx.doi.org/10.2139/ssrn.2636984

German Gutierrez Gallardo

New York University (NYU) - Leonard N. Stern School of Business, Students ( email )

NY
United States

Til Schuermann (Contact Author)

Oliver Wyman ( email )

1166 6th Avenue
New York City, NY
United States

Michael Duane

Oliver Wyman ( email )

1166 6th Avenue
New York City, NY
United States

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