Course description
Bank Stress-Testing - CCAR, DFAST, and ICAAP
This two-day program focuses on Bank Stress-Testing from a US bank perspective (including foreign banks active in the US). The capital stress-testing models presented can be used for Dodd-Frank Act required company-run stress tests under the same macroeconomic assumptions as used in the Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank Act Supervisory Stress Test (DFAST).
These models can also be used for banks’ Internal Capital Adequacy and Assessment Process (ICAAP) and Supervisory Review and Evaluation Procedure (SREP).
Over a sequence of workshops, participants will build a complete capital stress test model for a tier 1 corporate bank, illustrating stressed loan loss methodologies across all major loan types within retail and wholesale.
Finally, the course also covers qualitative aspects of CCAR, including Federal Reserve’s expectations regarding risk management and internal controls.
Upcoming start dates
Who should attend?
The Bank Stress-Testing course is beneficial to those involved in the financial sphere particularly professionals in the following areas:
- Bank credit and equity analysts
- Risk managers, counterparty risk, and CVA desks
- Asset managers
- Bond holders
- Hedge fund managers
- Bank treasury managers
- Bank regulatory capital managers
- Government Treasury staff
- Regulators
Training content
Day One
Introduction to Bank Stress-Testing
- What is stress-testing – capital vs liquidity stress-testing?
- Motivation for stress-testing – internal vs external supervisory and external investor purposes; bottom-up vs top-down. Stress tests as a comprehensive and fully integrated, quantitative health assessment of banks as distinct from partial CAMEL-based approaches
- Role of stress-testing in Comprehensive Capital Analysis and Review (CCAR); Dodd-Frank Act Supervisory Stress Test (DFAST); Internal Capital Adequacy and Assessment Process (ICAAP); and Supervisory Review and Evaluation Procedure (SREP), as well as in business planning
- Building blocks of a bank stress test model – pre-provision operating profits; loan loss and other asset provisioning; balance sheet; regulatory capital; linking the income statement, balance sheet, and regulatory capital models
Foundations
- Components of Federal Reserve’s annual assessment of large Bank Holding Companies (BHCs) – Comprehensive Capital Analysis and Review (CCAR); Dodd-Frank Act Supervisory Stress Test (DFAST)
- In-scope entities
- CCAR components and use of DFAST results – capital adequacy; capital planning process; planned capital distributions
- Mandatory elements of a capital plan
- CCAR qualitative assessment focus areas – governance; risk management; internal controls; capital policies; scenario design; projection methodologies
Case Study 1: Supervisory expectations of banks’ risk management framework and controls
Case Study 2: Linking macroeconomic and bank-level variables
- DFAST framework – baseline, adverse and severely adverse scenarios; minimum stressed capital ratio requirements; planning horizon
Case Study 3: DFAST 2016 scenarios
- BHC data submission
Scenario design framework for stress-testing – macroeconomic and financial market variables
Case Study 4: Scenario design 2012 – 2016
Workshop 1: Econometric techniques for stress-testing
- Multivariate ordinary least squares regression
- Markov processes
- Vector autoregression
DFAST Fed Modeling Methodology
Retail Lending
- Residential mortgages
Case Study 5: Probability of default (PD) model for first-lien residential mortgages
Case Study 6: Loss Given Default (LGD) model for first-lien residential mortgages
Case Study 7: PD model for HELOC residential mortgages
- Credit cards
Case Study 8: PD model for credit cards
- Auto
Case Study 9: PD model for auto loans
Case Study 10: LGD model for auto loans
- Other retail lending
Case Study 11: Net charge off model for small business loans
Case Study 12: Net charge off model for other consumer loans
Workshop 2: Modeling stressed retail loan losses for Bank of America Corporation
Day Two
Wholesale Lending
- Corporate
Case Study 13: PD change model for commercial and industrial loans
Case Study 14: LGD model for commercial and industrial (C&I) loans
- Commercial Real Estate (CRE) mortgages
Case Study 15: PD hazard rate model for CRE loans
Case Study 16: LGD model for CRE loans
- Loans Held For Sale or Measured Under Fair Value Option
Case Study 17: Discount yield model for corporate and CRE loans
Case Study 18: Duration and spread model for retail loans
Securities Available For Sale and Held To Maturity
- Present value method
- Full revaluation
- Duration-based approach
Trading Book
- Global market shock
- Credit valuation adjustment (CVA) losses
Counterparty Default
- Estimating impact of largest counterparty default
Case Study 19: Exposure, netting and collateral
Operational Risk
Case Study 20: Panel regression model
Case Study 21: Historical simulation model
Workshop 3: Modeling stressed corporate loan losses for Bank of America Corporation, both C&I and CRE
Pre-Provision Net Revenue
- Modeling interest income and interest expense
- Modeling non-interest income
- Modeling non-interest expenses
Balance Sheet and Risk Weighted Assets
- Fed’s industry-wide loan and non-loan asset growth model
- Applying Fed model to individual BHC
- Credit and market risk weighted asset projections
Regulatory Capital
- Linking to income statement, balance sheet and RWAs
- Transition arrangements
Workshop 4: Full capital stress test for Bank of America Corporation
- This workshop brings together all strands of a capital stress test for Bank of America, drawing on the components built in Workshops 2 and 3
- The stress test model can be used as a template for ICAAP/SREP purposes and for Dodd-Frank Act company-run stress tests performed under same macroeconomic assumptions as DFAST
Costs
The cost of Bank Stress-Testing - CCAR, DFAST, and ICAAP training course is available upon request.
Certification / Credits
London Financial Studies is registered with CFA and GARP Institute as an Approved Provider of continuing education programs. GARP & CFA Institute members attending this course are eligible for 16 CE/CPD credits.
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