Stress testing convergence

Author(s): 
German Gutierrez Gallardo, Til Schuermann, Michael Duane,

 

Abstract:
2015 marked the six-year anniversary of US regulatory stress testing. In this paper the authors observe three key trends: (1) Increasingly aggressive capital management: banks initially responded to CCAR by maintaining wide capital cushions versus regulatory minimums. As CCAR processes stabilise and capital minimums increase, however, 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 stabilise and, in some cases, converge. Secondly, 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:
capital requirements, CCAR, systemic risk, bank performance

 

German Gutierrez Gallardo is a PhD student in finance at NYU Stern School of Business. Prior to joining Stern, he was a principal at Oliver Wyman’s financial services practice, focusing on finance and risk topics. His areas of expertise include risk measurement and management, stress testing, model risk management and capital planning. German holds a BS and an MEng in Operations Research Engineering from Cornell University

 

Til Schuermann is a partner in Oliver Wyman’s financial services practice. Prior to joining Oliver Wyman in March 2011, Til was a senior vice president at the Federal Reserve Bank of New York, where he played a leadership role in the design and execution of the SCAP and subsequent CCAR programmes. Til has a PhD in economics from the University of Pennsylvania and a BA in economics from the University of California at Berkeley. He has numerous publications in both academic and practitioner journals.

 

Michael Duane is a partner in Oliver Wyman’s financial services practice, focusing on finance and risk topics. His areas of expertise include risk measurement and management, regulatory response, stress testing, capital planning and strategic planning/business management. Mike holds an AB in biology from Princeton University.

 

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