The results of the Comprehensive Capital Analysis and Review (CCAR), an annual exercise to evaluate the capital planning processes and capital adequacy of large financial institutions, will to a large extent be a reflection on each bank’s ability to aggregate risk data.
The CCAR results will be released on March 11.
“Risk-management systems, for both market and credit risk, have been designed to aggregate data based on the positions and internal views of risk,” said Alex Tsigutkin, CEO of AxiomSL. “Now the regulators are asking for aggregation at a very different level, which has not been traditionally an enterprise risk management type of exercise."
The problem, Tsigutkin said, “is that many of the enterprise risk systems do not have inherent data management infrastructure behind them. That deficiency has surfaced as a result of CCAR, which is the discipline that resulted from the financial crisis.”
The largest U.S.-based bank holding companies continue to build their capital levels and to strengthen their ability to lend to households and businesses during a period marked by severe recession and financial market volatility, according to the results of supervisory stress tests announced by the Federal Reserve last Thursday.
These were the fifth round of stress tests led by the Federal Reserve since 2009, and the third round required by the Dodd-Frank Act. The quantitative results from the stress tests are one component of the Federal Reserve's analysis during CCAR.
In the aftermath of the 2008 financial crisis, CCAR regulations came into play to help safeguard the U.S. banking system from another financial collapse. However, complying with CCAR provisions is a daunting task for banks, and despite attempts to improve on system integration and data quality, many banks continue to fail these tests.
“The Federal Reserve will release the results of the entire CCAR process, based on a review of the bank stress-testing results compared to the Fed’s expectations, and then either give them a thumbs up or thumbs down,” said Rob Lee, senior vice president at AxiomSL. “This process is very important in the sense that they're very public, and the banks that do not pass usually end up getting highlighted in the press, and it becomes a situation for them to have to contend with because they're no longer able to carry out their capital plans.”
In 2013, several large banks were cited for having weak capital plans and were subsequently asked to resubmit after an initial review.
“The Federal Reserve usually requires that they have to go back and resolve the issues that are identified before they are going to let them proceed with any sort of capital plans they have for the upcoming year, things like dividend payout, merger and acquisition activity, share buy-back," said Lee. "So passing these stress tests is very important to the banks.”
CCAR compliance involves three stages: data sourcing, analytics and reporting. “Many financial institutions have already embarked on the CCAR implementation, so for those that we've engaged from the very beginning we're helping then throughout the whole process," said Tsigutkin. “For those which came to us for our help in the middle of their CCAR endeavor, we are starting to help them with risk analytics, with aggregation-related stuff, and reporting. Because our technology handles individually data sourcing, risk data aggregation, and reporting, we are able to step into the CCAR process and help banks at any stage when they require our help.”
Featured image via Dollar Photo Club