Stress Testing Convergence
19 Pages Posted: 29 Jul 2015
Date Written: July 28, 2015
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: Suggested Citation