Stress testing convergence
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.
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Author's Biography
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 joined Oliver Wyman in August 2011 as a Partner in the Finance & Risk and Public Policy practices. His focus is on stress testing, capital planning, enterprise-wide risk management and corporate governance. Prior to Oliver Wyman, Til was a Senior Vice President at the Federal Reserve Bank of New York where he held numerous positions, including head of Financial Intermediation in Research and head of Credit Risk in Bank Supervision.
Michael Duane is a Principal in Oliver Wyman Financial Services’ Finance & Risk practice, based in New York. He has consulted to banks, insurers and public institutions across a range of risk and regulatory topics, including many engagements on enterprise-wide stress testing. He is a graduate of Princeton University.
Citation
Gallardo, German Gutierrez, Schuermann, Til and Duane, Michael (2016, January 1). Stress testing convergence. In the Journal of Risk Management in Financial Institutions, Volume 9, Issue 1. https://doi.org/10.69554/QMDK4141.
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