Unnamed: 0
int64 0
4.52k
| report
stringlengths 7
512
|
|---|---|
2,600 | ts in the years prior to SCAP, a statement that is consistent with regulatory findings during the same period. To some degree, this lack of rigorous testing reflected the relatively good economic times that preceded the financial crisis. According to one credit rating agency and a BHC, stress test assumptions generally tend to be more optimistic in good economic times and more pessimistic in bad economic times. In addition, one BHC noted that it had conducted stress tests on and off for about 20 years, but |
2,601 | usually only as the economy deteriorated. To address this issue, many BHC officials said that they have incorporated or are planning to incorporate more conservative inputs into their stress test models and are conducting more rigorous, firmwide stress testing more frequently. Although regulators’ guidelines have required for over 10 years that financial institutions use stress tests to assess their capacity to withstand losses, we found that regulators’ oversight of these tests had been limited. Horizontal |
2,602 | examinations by the regulators from 2006 through 2008 identified multiple weaknesses in institutions’ risk management systems, including deficiencies in stress testing. Areas of weaknesses found during examination included that the BHCs’ stress testing of their balance sheets lacked severity, were not performed frequently enough, and were not done on a firmwide basis. Also, it was found that BHCs’ risk governance process lacked the active and effective involvement of BHC senior management and board of dire |
2,603 | ctors. The SCAP stress test and the financial crisis revealed the same shortcomings in BHCs’ risk management and stress testing practices. However, we previously found that regulators did not always effectively address these weaknesses or in some cases fully appreciate their magnitude. Specifically, regulators did not take measures to push forcefully for institutions to better understand and manage risks in a timely and effective manner. In addition, according to our discussions with some SCAP participants, |
2,604 | oversight of these tests through routine examinations was limited in scope and tended to be discretionary. For example, regulators would review firms’ internal bank stress tests of counterparty risk and would make some suggestions, but reviews of these tests were done at the discretion of the individual supervisory team and were not consistently performed across teams. Even though BHCs have for many years performed stress tests to one degree or another, they have not been required to report the results of |
2,605 | their testing to the Federal Reserve unless it specifically requested the information. The Federal Reserve recently issued a letter to the largest banking organizations outlining its view on good practices with respect to the use of stress testing in the context of internal capital adequacy assessment practices (ICAAP). For example, some areas highlighted in the letter include how frequent a stress test should be performed, the minimum time frame that the test should cover, documentation of the process, inv |
2,606 | olvement of senior management and board of directors, and types of scenarios and risks to include in such tests. Some BHC officials believed that stress testing would become an integral part of future risk management practices and noted that SCAP helped them see how bank examiners would want them to stress their portfolios in the future. In anticipation of future action by regulators, many BHCs were designing at least part of their stress tests along the lines of SCAP. However, a few BHC officials hoped tha |
2,607 | t future stress tests would not be performed in the same manner as SCAP, with the largest institutions tested simultaneously in a largely public setting, but rather as part of the confidential supervisory review process. Federal Reserve officials stated that going forward, stress tests will become a fundamental part of the agency’s oversight of individual banks and the financial system. As a result of SCAP, Federal Reserve officials stated that they are placing greater emphasis on the BHCs’ internal capital |
2,608 | adequacy planning through their ICAAP. This initiative is intended to improve the measurement of firmwide risk and the incorporation of all risks into firms’ capital planning assessment and planning processes. In addition to enhanced supervisory focus on these practices across BHCs, stress testing is also a key component of the Basel II capital framework (Pillar 2). Under Pillar 2, supervisory review is intended to help ensure that banks have adequate capital to support all risks and to encourage that bank |
2,609 | s develop and use better risk management practices. All BHCs, including those adopting Basel II, must have a rigorous process of assessing capital adequacy that includes strong board and senior management oversight, comprehensive assessment of risks, rigorous stress testing and scenario analyses, validation programs, and independent review and oversight. In addition, Pillar 2 requires supervisors to review and evaluate banks’ internal capital adequacy assessments and monitor compliance with regulatory capit |
2,610 | al requirements. The Federal Reserve wants the large banks to conduct this work for themselves and report their findings to their senior management and boards of directors. According to Federal Reserve officials, for BHCs to satisfy the totality of expectations for ICAAP it may take 18 to 24 months, partly because the BHCs are taking actions to enhance practices where needed—including with respect to the use of stress testing and scenario analyses in internal capital assessments—and the Federal Reserve then |
2,611 | needs to evaluate these actions across a relatively large number of BHCs. In addition, the Federal Reserve is finalizing guidance for examiners to assess the capital adequacy process, including stress testing, for BHCs. Examiners are expected to evaluate how BHCs’ stress tests inform the process for identifying and measuring risk and decisions about capital adequacy. Federal Reserve officials stated that examiners are expected to look closely at BHCs’ internal stress test methodologies and results. In a le |
2,612 | tter to BHCs, the Federal Reserve also emphasized that institutions should look at time frames of 2 or more years and considers losses firmwide. It also suggested that BHCs develop their own stress test scenarios and then review these scenarios and the results for appropriate rigor and quantification of risk. While these are positive steps, examiners do not have specific criteria for assessing the quality of these tests. For example, the Federal Reserve has not established criteria for assessing the severit |
2,613 | y of the assumptions used to stress BHCs’ balance sheets. The Federal Reserve officials stated that they intend to have technical teams determine the type of criteria that will be needed to evaluate these assumptions, but they are in the early planning stages. Development of such criteria will be particularly helpful in ensuring the effective implementation of the stress test requirements under the Dodd-Frank Act. Without specific criteria, Federal Reserve examiners will not be able to ensure the rigor of B |
2,614 | HCs’ stress tests—an important part of the capital adequacy planning. Furthermore, the absence of such guidance could lead to variations in the intensity of these assessments by individual examiners and across regional districts. Following SCAP, regulatory and BHC officials we met with identified opportunities to enhance both the process and data inputs for conducting stress testing in the future. This would include processes for obtaining, analyzing, and sharing data and capabilities for data modeling and |
2,615 | forecasting, which potentially could increase the Federal Reserve’s abilities to assess risks in the banking system. According to the Federal Reserve, an essential component of this new system will be a quantitative surveillance mechanism for large, complex financial institutions that will combine a more firmwide and multidisciplinary approach for bank supervision. This quantitative surveillance mechanism will use supervisory information, firm-specific data analysis, and market-based indicators to identify |
2,616 | developing strains and imbalances that may affect multiple institutions, as well as emerging risks within specific institutions. This effort by the Federal Reserve may also improve other areas of supervision which rely on data and quantitative analysis, such as assessing the process used by BHC’s to determine their capital adequacy, forecasting revenue, and assessing and measuring risk, which is critical to supervising large, complex banks. Officials at the Federal Reserve told us that examiners should be a |
2,617 | nalyzing BHC performances versus their stress test projections to provide insight into the agency’s loss forecasting approach. Moreover, Federal Reserve officials stated that they are always looking to increase their analytical capabilities, and they have recently implemented a new governance structure to address some of their management information infrastructure challenges. However, not enough time has passed to determine the extent to which such measures will improve banking supervision. In addition, som |
2,618 | e other deficiencies were found in the data reported to the Federal Reserve by BHCs using the Y-9C, as well as the Federal Reserve’s ability to analyze the risk of losses pertaining to certain portfolios that were identified during the SCAP stress test. This led the Federal Reserve to develop a more robust risk identification and assessment infrastructure including internally developed models or purchased analytical software and tools from data vendors. Going forward, such models and analytics would facilit |
2,619 | ate improved risk identification and assessment capabilities and oversight, including the oversight of systemic risk. Moreover, a risk identification and assessment system that can gauge risk in the banking sector by collecting data on a timelier basis is necessary to better ensure the safety and soundness of the banking industry. Specific areas in which data collection and risk identification and assessment could be enhanced include mortgage default modeling to include more analysis of nontraditional mortg |
2,620 | age products, counterparty level exposures, country and currency exposures, and commodity exposures. An example of where the Federal Reserve used SCAP to significantly upgrade its ability to assess risks across large BHCs is the development of a system that allowed BHCs to submit their securities positions and market values at a fixed date and apply price shocks. This process was enhanced during SCAP to facilitate the stress analysis of securities portfolios held by SCAP BHCs. This system allowed the Federa |
2,621 | l Reserve to analyze approximately 100,000 securities in a relatively short time period. The Federal Reserve intends to continue using this database to receive and analyze updated positions from BHCs. With other portfolios, the Federal Reserve contracted with outside data and analytical systems providers. For multifamily loan portfolios, nonfarm loans, and nonresidential loans with a maturity beyond 2 years, all of which are subsets of commercial and industrial loans or commercial real estate portfolios, th |
2,622 | e Federal Reserve used internal models and purchased an outside vendor service that allowed it to estimate losses for these portfolios. For the remaining commercial portfolios, the Federal Reserve used different existing models found at both the Federal Reserve and Federal Reserve district banks and new models developed to meet the needs of SCAP. When analyzing BHCs’ mortgage portfolios, the consumer loans Supervisory Analytical and Advisory Team provided templates to the BHCs to collect granular data for s |
2,623 | uch analysis, allowing the system to separate BHCs’ mortgage portfolios into much more granular tranches than would be possible using data from regulatory filings. The Federal Reserve further used data from various sources, including a large comprehensive loan-level database of most mortgages that have been securitized in the United States to assist in developing its own loss estimates to benchmark against the BHCs’ proprietary estimates. These examples point to enhancements in the ability to assess risks t |
2,624 | o individual firms and across the banking sector that resulted from the SCAP stress test. The Federal Reserve has made clear that it views many of these innovations in its ability to assess and model risks and potential losses as permanent additions to its toolkit, and has also recognized the need for more timely and granular information to improve its supervision of BHCs and other institutions. However, the extent to which these models and tools will be distributed across the Federal Reserve district banks |
2,625 | and other federal banking regulators is unclear. In addition, as the stress test applied to trading positions was limited to those BHCs that held trading positions of at least $100 billion as of February 20, 2009, the Federal Reserve has not indicated that it will roll out its new system to BHCs with smaller trading positions. The Federal Reserve has taken steps to maintain and enhance the tools and data used during SCAP. Further, improving the Federal Reserve’s financial data collection and supervisory to |
2,626 | ols will require additional resources, training for bank examiners, coordination in the dissemination of new infrastructure across all U.S. financial regulators, and, according to a Federal Reserve governor, would benefit from relief from the Paperwork Reduction Act of 1980 as well. The Federal Reserve lacks a complete plan on how it will achieve permanent improvements in its risk identification and assessment infrastructure, but according to officials, such a plan is in development. The Federal Reserve has |
2,627 | finalized a plan that describes a governance structure for overseeing large, complex financial organizations. The plan defines the roles and responsibilities of various committees and teams within the Federal Reserve that will carry out its supervisory responsibilities over these organizations. However, further planning is needed to incorporate lessons learned from SCAP for addressing data and modeling gaps that existed prior to the crisis and a structure for disseminating improvements to risk identificati |
2,628 | on and assessment. Specifically, this plan will also be critical to addressing improvements to data and modeling infrastructure in supervising not only large financial holding companies but also smaller institutions. A fully developed plan would also consider how to disseminate data, models, and other infrastructure to the entire Federal Reserve System and bank regulatory agencies, as well as the newly established Financial Stability Oversight Council and Treasury’s Office of Financial Research. Without suc |
2,629 | h a plan, the agency runs the risk of not optimizing its oversight responsibilities, especially in light of its new duties as the systemic risk regulator under the Dodd-Frank Act. Another critical lesson from SCAP was the need for robust coordination and communication among the regulators in examining large, complex financial institutions. Officials from the regulatory agencies and BHCs stated that the degree of cooperation among the SCAP regulators was unprecedented and improved the understanding of the ri |
2,630 | sks facing the individual BHCs and the financial market. Such coordination and communication will become increasingly important as banking regulators increase their oversight role. Even with recent major reform to the financial regulatory structure, multiple regulatory agencies continue to oversee the banking industry, and regulators will need to prioritize efforts to promote coordination and communication among staff from these agencies so that emerging problematic issues affecting the financial industry a |
2,631 | re identified in a timely manner and effectively addressed. Going forward, based on our discussions with various SCAP participants and statements by Federal Reserve officials, including the chairman, the regulators’ experience with SCAP is anticipated to lead to the expanded use of horizontal examinations and multidisciplinary staff that will require extensive interagency coordination. Horizontal examinations may involve multiple regulators and underscore the importance of effective coordination and communi |
2,632 | cation. Currently, regulators are conducting horizontal examinations of internal processes that evaluate the capital adequacy at the 28 largest U.S. BHCs. Their focus is on the use of stress testing and scenario analyses in ICAAP, as well as how shortcomings in fundamental risk management practices and governance and oversight by the board of directors for these processes could impair firms’ abilities to estimate their capital needs. Regulators recently completed the initial phase of horizontal examinations |
2,633 | of incentive compensation practices at 25 large U.S. BHCs. As part of this review, each organization was required to submit an analysis of shortcomings or “gaps” in its existing practices relative to the principles contained in the proposed supervisory guidance issued by the Federal Reserve in the fall of 2009 as well as plans—including timetables—for addressing any weaknesses in the firm’s incentive compensation arrangements and related risk-management and corporate governance practices. In May 2010, regu |
2,634 | lators provided the banking organizations feedback on the firms’ analyses and plans. These organizations recently submitted revised plans to the Federal Reserve for addressing areas of deficiencies in their incentive compensation programs. In a June 2010 press release, the Federal Reserve noted that to monitor and encourage improvements in compensation practices by banking organizations, its staff will prepare a report after 2010 on trends and developments in such practices at banking organizations. Our pri |
2,635 | or work has found that coordination and communication among regulatory agencies is an ongoing challenge. For example, in 2007, OCC onsite examiners, as well as officials in headquarters, told us that coordination issues hampered the Federal Reserve’s horizontal examinations. Also, in 2007, a bank told us that it had initially received conflicting information from the Federal Reserve, its consolidated supervisor, and the OCC, its primary bank supervisor, regarding a key policy interpretation. Officials from |
2,636 | the bank also noted that when the Federal Reserve collected information, it did not coordinate with OCC, the primary bank examiner of the lead bank, resulting in unnecessary duplication. We noted that to improve oversight in the future, regulators will need to work closely together to expedite examinations and avoid such duplications. Since the SCAP stress test was concluded, the following examples highlight ongoing challenges in coordination and communication: Officials from OCC and FDIC indicated that the |
2,637 | y were not always involved in important discussions and decisions. For example, they were not involved in the decision to reduce GMAC’s SCAP capital requirement, even though they were significantly involved in establishing the original capital requirement. Also, FDIC noted that it was excluded from such decision even though it is the primary federal bank regulator for GMAC’s retail bank (Ally Bank). The Federal Reserve held an internal meeting to discuss lessons learned from SCAP, but has yet to reach out t |
2,638 | o the other SCAP regulators. The OCC and FDIC told us that they had not met with the Federal Reserve as a group to evaluate the SCAP process and document lessons learned. As a result, the FDIC and OCC did not have an opportunity to share their views on what aspects of SCAP worked and did not work, as well as any potential improvements that can be incorporated into future horizontal reviews or other coordinated efforts. In the recent horizontal examinations, both FDIC and OCC noted that the interagency proce |
2,639 | ss for collaboration—especially in the initial design stages—was not as effective as it was for SCAP. OCC commented that more collaboration up front would have been preferable. Also, FDIC stated that the Federal Reserve did not include it in meetings to formulate aggregate findings for the horizontal examination of incentive compensation programs, and it experienced difficulties in obtaining aggregate findings from the Federal Reserve. The Federal Reserve commented that the FDIC was involved in the developm |
2,640 | ent of findings for those organizations that control an FDIC-supervised subsidiary bank and that FDIC has since been provided information on the findings across the full range of organizations included in the horizontal review, the majority of which do not control an FDIC-supervised subsidiary bank. These continued challenges in ensuring effective coordination and communication underscore the need for sustained commitment and effort by the regulators to ensure the inclusion of all relevant agencies in key d |
2,641 | iscussions and decisions regarding the design, implementation, and results of multiagency horizontal examinations. As the SCAP process has shown, active participation by all relevant regulators can strengthen approaches used by examiners in performing their supervisory activities. Without continuous coordination and communication, the regulators will miss opportunities to leverage perspectives and experiences that could further strengthen the supervision of financial institutions, especially during horizont |
2,642 | al examinations of financial institutions. Publicly reporting a comparison of the actual performance of the SCAP BHCs and the estimated performance under a more adverse scenario provides insights into the financial strength of the nation’s largest BHCs. Senior Federal Reserve officials have publicly disclosed select aggregate information about the performance of the 19 BHCs consistent with the recommendation in our June 2009 report. Specifically, we recommended that the Federal Reserve consider periodically |
2,643 | disclosing to the public the performance of the 19 BHCs against the SCAP estimates during the 2-year period. However, the Federal Reserve has yet to commit to completing a final analysis that compares the BHCs’ actual performance with the estimated performance under SCAP’s more adverse economic scenario for the entire 2-year period and making this analysis public. Such an analysis is important for the market and BHCs to assess the rigor of the stress test methodology. Publicly releasing the results also wo |
2,644 | uld allow the public to gauge the health of the BHCs that participated in SCAP, which is a strong proxy for the entire U.S. banking industry. And public disclosure of this analysis could act as a catalyst for a public discussion of the value of effective bank risk management and enhance confidence in the regulatory supervision of financial institutions. The public release of the stress test methodology and results helped improve market confidence in the largest BHCs during the recent financial crisis and pr |
2,645 | ovided an unprecedented window into bank supervision process. Subsequently, the Chairman of the Federal Reserve and a Federal Reserve governor have publicly stated that greater transparency should be built into the supervisory process and that feedback from the public could help increase the integrity of the supervisory process. Increased transparency can also augment the information that is available to investors and counterparties of the institutions tested and enhance market discipline. Despite these sta |
2,646 | tements, the Federal Reserve and other bank regulators have yet to start a formal dialogue about this issue, nor have they developed a plan for integrating public disclosures into the ongoing supervisory process. Such a plan could detail the types of information that would benefit the markets if it were publicly released; the planned methodology for the stress tests, including assumptions; the frequency with which information would be made public; and the various means of disseminating the information. Taki |
2,647 | ng into account the need to protect proprietary information and other market-sensitive information would be an important part of such a plan. While regulators will undoubtedly face challenges in determining how best to overcome skepticism about the potential effects on the financial markets of disclosing sensitive information on the financial health of banks, the Dodd-Frank Act requires that the Federal Reserve and certain banks publicly release a summary of results from periodic stress tests. Without a pla |
2,648 | n for enhancing the transparency of supervisory processes and practices, bank regulators may miss a significant opportunity to further strengthen market discipline and confidence in the banking industry by providing investors, creditors, and counterparties with useful information. The SCAP stress test shed light on areas for further improvement in the regulators’ bank supervision processes, including oversight of risk management practices at BHCs. Prior to SCAP, regulatory oversight of stress tests performe |
2,649 | d by the BHCs themselves was ineffective. Specifically, although regulators required stress tests, the guidelines for conducting them were more than a decade old, and the individual banks were responsible for designing and executing them. The Federal Reserve’s reviews of the internal stress tests were done at the discretion of the BHCs’ individual supervisory teams and were not consistently performed. Further, even though BHCs performed stress tests, they were not required to report the results of their str |
2,650 | ess testing to the Federal Reserve without a specific request from regulators. Post-SCAP, however, the Federal Reserve has stated that stress testing will now be a fundamental part of their oversight of individual banks. The Federal Reserve expects to play a more prominent role in reviewing assumptions, results, and providing input into the BHCs’ risk management practices. While the Federal Reserve has begun to take steps to augment its oversight, currently Federal Reserve examiners lack specific criteria f |
2,651 | or assessing the severity of BHCs’ stress tests. Without specific criteria, Federal Reserve examiners will not be able to ensure the rigor of BHCs’ stress tests. Furthermore, the absence of such criteria could lead to variations in the intensity of these assessments by individual examiners and across regional districts. The experience with SCAP also showed that regulators needed relevant and detailed data to improve oversight of individual banks and to identify and assess risks. As the Federal Reserve and t |
2,652 | he other regulators conduct more horizontal reviews, they will need a robust plan for quantitatively assessing the risk in the banking sector. Collecting timely data for the annual stress testing and other supervisory actions will be critical in order to better ensure the safety and soundness of the banking industry. The Federal Reserve has finalized a plan that describes a governance structure for overseeing large, complex financial organizations. However, further planning is needed to incorporate lessons |
2,653 | learned from SCAP for addressing data and modeling gaps and a structure for disseminating improvements to risk identification and assessment. Further, efforts to improve the risk identification and assessment infrastructure will need to be effectively coordinated with other regulators and the newly established Financial Stability Oversight Council and Treasury’s Office of Financial Research in order to ensure an effective systemwide risk assessment. Without fully developing a plan that can identify BHCs’ ri |
2,654 | sks in time to take appropriate supervisory action, the Federal Reserve may not be well- positioned to anticipate and minimize future banking problems and ensure the soundness of the banking system. Despite the positive coordination and communication experience of the SCAP stress test, developments since the completion of SCAP have renewed questions about the effectiveness of regulators’ efforts to strengthen their coordination and communication. For example, on important issues, such as finalizing GMAC’s S |
2,655 | CAP capital amount, the Federal Reserve chose not to seek the views of other knowledgeable bank regulators. While the Dodd-Frank Act creates formal mechanisms that require coordination and communication among regulators, the experiences from SCAP point to the need for a sustained commitment by each of the banking regulators to enhance coordination and communication. In particular, ensuring inclusion of relevant agencies in key discussions and decisions regarding the design, implementation, and results of mu |
2,656 | ltiagency horizontal examinations will be critical. If regulators do not consistently coordinate and communicate effectively during horizontal examinations, they run the risk of missing opportunities to leverage perspectives and experiences that could further strengthen bank supervision. To gain a better understanding of SCAP and inform the use of similar stress tests in the future, we recommend that the Chairman of the Federal Reserve direct the Division of Banking Supervision and Regulation to: Compare th |
2,657 | e performance of the 19 largest BHCs against the more adverse scenario projections following the completion of the 2-year period covered in the SCAP stress test ending December 31, 2010, and disclose the results of the analysis to the public. To leverage the lessons learned from SCAP to the benefit of other regulated bank and thrift institutions, we recommend that the Chairman of the Federal Reserve in consultation with the heads of the FDIC and OCC take the following actions: Follow through on the Federal |
2,658 | Reserve’s commitment to improve the transparency of bank supervision by developing a plan that reconciles the divergent views on transparency and allows for increased transparency in the regular supervisory process. Such a plan should, at a minimum, outline steps for releasing supervisory methodologies and analytical results for stress testing. Develop more specific criteria to include in its guidance to examiners for assessing the quality of stress tests and how these tests inform BHCs’ capital adequacy pl |
2,659 | anning. These guidelines should clarify the stress testing procedures already incorporated into banking regulations and incorporate lessons learned from SCAP. Fully develop its plan for maintaining and improving the use of data, risk identification and assessment infrastructure, and requisite systems in implementing its supervisory functions and new responsibilities under the Dodd-Frank Act. This plan should also ensure the dissemination of these enhancements throughout the Federal Reserve System and other |
2,660 | financial regulators, as well as new organizations established in the Dodd-Frank Act. Take further steps to more effectively coordinate and communicate among themselves. For example, ensuring that all applicable regulatory agencies are included in discussions and decisions regarding the development, implementation, and results of multiagency activities, such as horizontal examinations of financial institutions. We provided a draft of this report to the Federal Reserve, FDIC, OCC, OTS, and Treasury for revie |
2,661 | w and comment. We received written comments from the Chairman of the Federal Reserve Board of Governors and the Assistant Secretary for Financial Stability. These comments are summarized below and reprinted in appendixes IV and V, respectively. We also received technical comments from the Federal Reserve, FDIC, OCC, and Treasury, which we incorporated into the report as appropriate. OTS did not provide any comments. In addition, we received technical comments from the Federal Reserve and most of the 19 SCAP |
2,662 | BHCs on the accuracy of our tracking of revenues and losses in 2009 for each of the SCAP BHCs and incorporated them into the report as appropriate. In its comment letter, the Federal Reserve agreed with all five of our recommendations for building on the successes of SCAP to improve bank supervision. The Federal Reserve noted that our recommendations generally relate to actions it is currently undertaking or planning to take under the Dodd-Frank Act. It also cited that in coordination with FDIC and OCC, it |
2,663 | would provide a public assessment of BHCs’ performance relative to the loss and preprovision net revenue estimates under the more adverse scenario, taking into account the limitations of such an analysis. For our remaining recommendations related to increased transparency, examiner guidance, risk identification and assessment, and coordination and communication of multiagency activities, the Federal Reserve generally noted that it has taken step in these areas and will continue to consult with the FDIC and |
2,664 | OCC in implementing our recommendations and its new responsibilities under the Dodd-Frank Act. While our report recognizes the steps that the Federal Reserve has taken related to transparency, examiner guidance, risk identification and assessment, and coordination and communication of multiagency activities, these areas warrant ongoing attention. For example, as we note in the report, while the Federal Reserve is in the process of finalizing examination guidance for reviewing stress tests, examiners curren |
2,665 | tly do not have specific criteria for assessing the severity of these tests nor have they coordinated with the other bank regulators. Until this guidance is completed, examiners will lack the information needed to fully ensure the rigor of BHCs’ stress tests, and the Board will not be able to fully ensure the consistency of the assessment by individual examiners. Our report also notes the positive coordination and communication experience of the SCAP stress test, but we continued to find specific instances |
2,666 | since the completion of SCAP that have renewed questions about the effectiveness of regulators’ efforts to strengthen their coordination and communication. For instance, while the Federal Reserve included relevant agencies in key discussions and decisions regarding the design, implementation, and results of SCAP, we found that the Federal Reserve missed opportunities to include other bank regulators when planning more recent horizontal examinations. Treasury agreed with our report findings, noting that it a |
2,667 | ppreciated our acknowledgment that SCAP met its goals of providing a comprehensive, forward-looking assessment of the balance sheet risks of the largest banks and increasing the level and quality of capital held by such banks. It further noted that the unprecedented public release of the stress test results led to an increase in the market confidence in the banking system, which aided in improving the capital adequacy of the largest banks. We are sending copies of this report to the appropriate congressiona |
2,668 | l committees; Chairman of the Federal Reserve, the Acting Comptroller of Currency, Chairman of the FDIC, the Acting Director of the Office of the Thrift Supervision, and the Secretary of the Treasury. Also, we are sending copies of this report to the Congressional Oversight Panel, Financial Stability Oversight Board, the Special Inspector General for TARP, and other interested parties. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. Should you or your staff |
2,669 | have any questions on the matters discussed in this report, please contact me at (202) 512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this letter. GAO staff who made key contributions to this report are listed in appendix VI. The objectives of this report were to (1) describe the process used to design and conduct the stress test and participants views’ of the process, (2) describe the extent to which the stress te |
2,670 | st achieved its goals and compare its estimates with the bank holding companies’ (BHC) actual results, and (3) identify the lessons regulators and BHCs learned from the Supervisory Capital Assessment Program (SCAP) and examine how each are using those lessons to enhance their risk identification and assessment practices. To meet the report’s objectives, we reviewed the Board of Governors of the Federal Reserve System’s (Federal Reserve) The Supervisory Capital Assessment Program: Design and Implementation ( |
2,671 | SCAP design and implementation document) dated April 24, 2009, and The Supervisory Capital Assessment Program: Overview of Results (SCAP results document) dated May 7, 2009. We analyzed the initial stress test data that the Federal Reserve provided to each BHC, the subsequent adjustments the Federal Reserve made to these estimates, and the reasons for these adjustments. We reviewed BHC regulatory filings such as the Federal Reserve’s 2009 Consolidated Financial Statements for Bank Holding Companies—-FR Y-9C |
2,672 | (Y-9C); company quarterly 10-Qs and annual 10-Ks; speeches and testimonies regarding SCAP and stress testing; BHCs’ presentations to shareholders and earnings reports; bank supervision guidance issued by the Federal Reserve, Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC); and documents regarding the impact of SCAP and the financial crisis and proposed revisions to bank regulation and supervisory oversight. To further understand these documents and obta |
2,673 | in different perspectives on the SCAP stress test, we interviewed officials from the Federal Reserve, OCC, FDIC, and the Office of the Thrift Supervision, as well as members of the multidisciplinary teams created to execute SCAP. We also collected data from SNL Financial—a private financial database that contains publicly filed regulatory and financial reports, including those of the BHCs involved in SCAP—in order to compare the BHCs’ actual performance in 2009 against the regulators’ 2-year SCAP loss estim |
2,674 | ates and GAO’s 1-year pro rata loss estimates. To obtain additional background information regarding the tracking of the BHCs, perspectives on their performance, anticipated loan losses, and the success of SCAP in achieving its goals, we interviewed relevant officials (e.g., chief risk officers and chief financial officers) from 11 of the 19 BHCs that participated in the SCAP stress test. The BHCs we interviewed were the American Express Company; Bank of America Corporation; The Bank of New York Mellon Corp |
2,675 | oration; BB&T Corporation; Citigroup Inc.; GMAC LLC; The Goldman Sachs Group, Inc.; JPMorgan Chase & Co.; MetLife, Inc.; Regions Financial Corporation; and Wells Fargo & Company. We selected these BHCs to reflect differences in size, types of financial services provided, geographic location, primary bank regulator, and participation in the Troubled Asset Relief Program (TARP). In addition, we met with credit rating agency officials from the Standard and Poor’s Corporation, Moody’s Corporation, and Fitch Rat |
2,676 | ings Inc. for their perspective on SCAP and their own stress test practices. To more completely understand the execution of SCAP, we completed a literature search of stress tests conducted by others—for example, the Committee on European Banking Supervisors and the International Monetary Fund. We also reviewed relevant credit rating agency reports and the reports of other oversight bodies such as the Congressional Oversight Panel and the Special Inspector General for the Troubled Asset Relief Program on top |
2,677 | ics related to stress testing and TARP. We also reviewed our past work on the bank supervisory process and SCAP. In addition, to track the actual performance of the 19 BHCs, we collected data from several sources. We then compared the BHCs’ actual performance to the December 31, 2008, capital levels presented in SCAP and the projections made under the more adverse scenario for estimated losses for loans, securities (available for sale and held to maturity), trading and counterparty, and resources other than |
2,678 | capital to absorb losses. Our primary source for SCAP estimates was the May 7, 2009, SCAP results document, which contained the estimates for each of the 19 BHCs and aggregate data for all BHCs. We also reviewed the confidential April 24, 2009, and May 5, 2009, presentations that the SCAP regulators made to each of the 19 BHCs to identify estimates of preprovision net revenue (PPNR) and changes in allowance for loan and lease losses (ALLL) for the 2 years ended 2010. Our primary source for the actual resul |
2,679 | ts at the BHCs was the Federal Reserve’s Y-9C. In doing so, we used the SNL Financial database to extract data on the Y-9C and the Securities and Exchange Commission forms 10-K and 10-Q. These data were collected following the close of the fourth quarter of 2009, the halfway point of the SCAP’s 2-year time frame. Since losses were not estimated on a quarter-by-quarter or yearly basis but projected for the full 2-year period, we assumed that losses and revenue estimates under the more adverse scenario were d |
2,680 | istributed at a constant rate across the projection period. Thus, we compared the actual 2009 year end values with half of the Federal Reserve’s 2-year SCAP projections. This methodology has some limitations because losses, expenses, revenues, and changes to reserves are historically unevenly distributed and loss rates over a 2-year period in an uncertain economic environment can follow an inconsistent path. However, the Federal Reserve, OCC, credit rating agencies, an SNL Financial analyst, and most of the |
2,681 | BHCs we interviewed who are tracking performance relative to SCAP estimates are also using the same methodology. We assessed the reliability of the SNL Financial database by following GAO’s best practices for data reliability and found that the data was sufficiently reliable for our purposes. To confirm the accuracy of our BHC tracking data, we shared our data with the Federal Reserve and the 19 SCAP BHCs. We received comments and incorporated them as appropriate. Some of the data that we collected were no |
2,682 | t in a form that was immediately comparable to the categories used in the SCAP results, and we had to make adjustments in order to make the comparison. For tier 1 common capital, most asset categories, and resources other than capital to absorb losses, we had to find a methodology suited to aggregating these data so that we could compare it to the corresponding SCAP data. For example, net-charge offs for the various loan categories are broken out into more subcategories in the Y-9C than those listed in the |
2,683 | SCAP results. In addition, we calculated “Resources Other than Capital to Absorb Losses” to correspond to the SCAP definition of PPNR minus the change in ALLL, which required obtaining data from multiple entries within the Y- 9C. When calculating noninterest expense we removed the line item for goodwill impairment losses because this item was not included in the SCAP regulators’ projections. We also used the calculation of a change in ALLL until December 31, 2009. But the SCAP regulators considered an incre |
2,684 | ase in ALLL over the full 2-year period to be a drain on resources, because the provisions made to increase the ALLL balance would not be available to absorb losses during the 2-year SCAP time frame. This notion creates a problem in using the formula for 1-year tracking purposes because an increase in ALLL during 2009 would require provisions for that increase, but those added reserves could ultimately be used to absorb losses during 2010. To maintain consistency, our calculation considers ALLL increases du |
2,685 | ring 2009 to be a drain on resources, but we recognize that this money could act as a resource to absorb losses rather than a drain on those resources. We faced an additional limitation pertaining to the ALLL calculation and a challenge with regard to the treatment of trading and counterparty revenues. In our review of SCAP documentation, we found that SCAP regulators used two different ALLL calculations—1 calculation for 4 of the BHCs that included a reserve for off-balance sheet items and another for the |
2,686 | remaining 15 BHCs that did not include off-balance sheet reserves. The Federal Reserve confirmed that there were two different calculations that were not adjusted for consistency. In order to be consistent across the BHCs, we applied the same methodology that the regulators used for 15 of the BHCs to the 4 that remained. The treatment of trading and counterparty revenue created a challenge because the data in the Y-9C includes both customer derived revenue from transactions for BHCs that operate as broker-d |
2,687 | ealers and gains (or losses) from proprietary trading and certain associated expenses. These items are presented only in net form in the Y-9C. However, for the five BHCs (Bank of America Corporation; Citigroup, Inc.; Goldman Sachs Group, Inc.; JPMorgan Chase & Co.; and Morgan Stanley) that had their trading portfolios stressed, the trading and counterparty line is based on projections of gains (losses) from proprietary trading, but PPNR (specifically noninterest revenue) is based on gains from customer deri |
2,688 | ved revenue from transactions for BHCs that operate as broker-dealers. Because we could not segregate these items based on the Y-9C, we have included the net amount in both the trading and counterparty and noninterest income line items. This means that the net amount of the trading gains or losses as reported in the Y-9C are included in two places in our tracking table for those five BHCs. For the remaining 14 BHCs, we included the entire line item in noninterest income, as that is where it was located in t |
2,689 | he SCAP projections. Table 6 shows the items we used to calculate tier 1 capital, asset losses, PPNR, and ALLL as of December 31, 2009 and the specific sources we used. We also included specific references to the sources we used. Some elements within the table required a more detailed aggregation or calculation and are therefore explained further in tables 7 and 8 below. For reporting these capital measures and asset balances for the year ending December 31, 2008, we generally relied on the figures publishe |
2,690 | d in various SCAP documents. Table 7 shows our methodology for calculating tier 1 common capital, including the part of the Y-9C in which the data can be found. Currently, there is no defined regulatory method for calculating tier 1 common capital, and it is not a required data field for BHCs to file in their Y-9C submissions. As a result, we developed a formula consistent with the Federal Reserve’s by reviewing the guidance available in the SCAP design and implementation and SCAP results documents and cons |
2,691 | ulting with SNL Financial regarding its methodology. Table 8 provides a crosswalk for the asset classification we used to group the various charge-off categories listed in the Y-9C. To ensure additional comparability with SCAP, we attempted to identify any unique circumstances that could skew the results. For example, after we shared our initial tracking estimates with the 19 BHCs, one BHC had identified an issue with our calculation of tier 1 common capital that resulted from the way information is reporte |
2,692 | d on the Y-9C. After discussing the issue with the BHC and verifying their explanation, we adjusted our calculation to more accurately reflect their position. Another BHC also had a one-time charge that had been included in the “Other” loss category, and we decided to segregate this item as a separate line item. We have also submitted our tracking spreadsheet to the Federal Reserve and to each BHC to give them an opportunity to provide input and ensure the accuracy and comparability of our numbers. Appropri |
2,693 | ate adjustments to 2009 numbers based on information received from the Federal Reserve and individual BHCs are noted, where applicable, in the tables in appendix III. Some items that impact precise comparisons between actual results and the pro rata estimates are disclosed in our footnotes, rather than as adjustments to our calculations. For example, the stress test was applied to loan and other asset portfolios as of December 31, 2008, without including a calculation for ongoing banking activities. Because |
2,694 | the Y-9C data includes ongoing activity as of the date of the report, the actual results are slightly different than the performance of the stressed assets as the BHCs were treated as liquidating concerns rather than going concerns in the SCAP stress test. Distinguishing between the gains (losses) from legacy assets and those that resulted from new assets is not possible using public data. Other examples are that SCAP did not include the impact of the owned debt value adjustment or one-time items (occurrin |
2,695 | g subsequent to SCAP) in their projections of PPNR. As credit default swap spreads narrowed in 2009, liability values increased at most banks, causing a negative impact on revenue at those banks that chose to account for their debt at fair value; but these losses were not included in the SCAP estimates. One-time items, such as sales of business lines, were also not included in the SCAP estimates of PPNR, as these events occurred subsequent to the stress test and, in part, could not be fully predicted as a p |
2,696 | art of SCAP. Rather than remove the losses from the owned debt value adjustments and the gains (or losses) due to one-time items from the BHCs’ 2009 PPNR results, we disclosed the amounts in footnotes for the applicable BHCs. We chose this treatment so that PPNR would reflect actual results at the BHCs, while still disclosing the adjustments needed for more precise comparability to SCAP. We identified the TARP status of each of the 19 BHCs that participated in SCAP by reviewing data from the Treasury’s Offi |
2,697 | ce of Financial Stability’s TARP Transactions Report for the Period Ending September 22, 2010 (TARP Transactions Report) and the SCAP results document. We used the SCAP results document to identify BHCs that were required to raise capital. The TARP Transactions Report, was then used to identify the program under which TARP funds were received (if any), the amount of funds received, capital repayment date, amount repaid, and warrant disposition date and to determine whether the warrants were repurchased or s |
2,698 | old by Treasury in a public offering. To gain a better understanding of future potential losses, we determined the percentage of BHCs’ total loans that are either nonaccrual or more than 90 days past due using Y-9C data from the SNL Financial database. We used quarterly data for the period 2007 through 2009 on nonaccrual loans and past due balances of more than 90 days, for each of the BHCs. We aggregated the data into the same six loan categories used in SCAP: first-lien mortgages, second/junior-lien mortg |
2,699 | ages, commercial and industrial loans, commercial real estate loans, credit card balances, and “Other.” (See tables 8 and 9 for details.) Once the data were aggregated, we divided that data by the applicable total loan balance for each category at each point in time (i.e., quarterly basis). One limitation is that Y-9C data were not available for all periods for four of the BHCs (American Express Company; GMAC LLC; The Goldman Sachs Group, Inc.; and Morgan Stanley) because they had recently became BHCs. As a |
Subsets and Splits
No community queries yet
The top public SQL queries from the community will appear here once available.