CCAR efficiency

CCAR efficiency

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CCAR continues to consume a large portion of the year for those involved, and many institutions face a ‘bottleneck’ of work when scenarios are released in order to meet deadlines, and submit results within the allocated time. The pressure for those involved increases annually with increased media scrutiny and heavily publicised outcomes of the stress tests, the world watches in anticipation for the annual results. This creates a huge potential reputational risk, with results being so readily available, no consumer wants to hear their trusted bank has failed, and what does failure mean to them?

The results for CCAR 2017 were released on June 28, to mostly success, for the first year no capital plans were rejected by the regulator, meaning effectively, all ‘passed’, with all 34 firms exceeding minimum requirements for the aggregated quantitative results. With these results in mind, CCAR firms appear to be in a much stronger position with their capital planning and stress testing with no objections, and only one resubmission for 2017. With institutions breathing a little easier and heightened confidence in institutions and the system, the focus now shifts towards 2018 and leveraging lessons learnt from 2017 to further progress and begin embedding into day to day activity.

With this in mind, the Center for Financial Professionals’ research team conducted an extensive survey with industry professionals to identify how the focus is shifting and what the key targets and objectives are as institutions begin preparations ahead of 2018 tests. The results of this research study are broadly outlined in this report, but individual topics will be addressed by industry leaders at the upcoming 5th Annual Stress Testing USA: CCAR & DFAST Congress, taking place in NYC on November 7-8.

With results coming through overall positively across the industry, the tides are turning towards a more strategic focus now the fundamentals are in place for most infrastructures. As outlined above, stress testing annually dominates extensive time and resources of an increasingly larger number of professionals, eventually all reaching a bottleneck as the scenarios are released and the real work begins. For the meantime, CCAR is here to stay as an annual exercise, so institutions must develop techniques to increase efficiencies within the process. This comes under incorporating stress testing and more specific CCAR requirements into business as usual (BAU). Stress testing is not currently part of day to day activities, and is for the most part managed by a range of departments and technical experts, this puts a huge strain on resources during submission with some areas potentially becoming slightly neglected. When fine tuning the process and building out infrastructure and capabilities to increase efficiencies, it is essential the build out have a level of adaptability, stress testing is a fluid process so adaptability is crucial to success.

With CCAR being such a complex and intensive process, institutions have their work cut out to maintain the level the industry currently stands, with all institutions passing capital plans, it is unclear whether regulators will then up the pressure to challenge further. With this in mind, increasing efficiencies in CCAR and ensuring adaptability in model and infrastructure build up is crucial. Many institutions are turning their attention to technology offerings, in an increasingly digital age, it is a clear progression to use technology for efficient stress tests. Technology can be used in a number of ways to increase speed and reduce human intervention, with machine learning capabilities, technology can produce outcomes a lot quicker than humans, with less error. As part of the research study, many questioned the technology available and innovative solutions applicable to stress testing. CCAR is a complex and intricate challenge, with many components that must come together seamlessly, some aspects require human judgment techniques, many others can be effectively ‘outsourced’ to technology and innovative solutions. As mentioned above, the process is increasingly resource intensive, with many departments becoming involved and engaged in the process. Technology could provide some ease on the resource strain by limiting manual intervention and reducing cost and execution time, if balanced correctly with expert judgment and oversight. Stress Testing USA: CCAR & DFAST addresses the future of stress testing and offers solutions to aspects of stress testing that lend themselves to technological intervention.

Finally, in amongst all of the progress and forward thinking to improve stress testing and its rigorous requirements, comes the uncertainty surrounding the future of CCAR. Under the new administration and the financial choice act, an element of uncertainty has been added to the mix. With many predicting the act not having the traction to pass the senate, the question remains how seriously to consider the possibility of this becoming possible? Many institutions mentioned a noticeable draw back in resources and head count after the House of Representatives passed the bill, this portrays a worrying trend as institutions prepare for 2018 tests, will they maintain the success rate with limitations on resources? The discussions around the new administration and implications of the financial choice act have raised further discussion around best practice in stress testing, and how institutions can leverage the work conducted and create a new best practice aside from regulation. Many respondents referred to the insurance sector and their influence on stress testing best practice, with limited regulatory scrutiny as a comparison to banking, yet their level of rigor in the tests and incorporation into strategy has driven the industry forward. As a result of this feedback, CRO from Genworth Financial will be joining Stress Testing USA: CCAR & DFAST to discuss her experiences and work they have undertaken for stress testing and results they have seen aside from just compliance.

Overall the future of stress testing is uncertain, but what appears apparent is that it will prevail as best practice, many have the infrastructure, resources and modelling capabilities to continue with annual stress tests, and will look to own the process internally vs. simply for regulatory approval. This allows the tests to be tailored to specific institutions and paves the way for future collaboration with strategic teams to drive the business in the right direction. If the future of CCAR remains on the current path, institutions, based on 2017 results are in a good position to further develop their process to harness technology innovations and maximize on the process to increase efficiency.

All of the above topics and many more will be discussed with over 250 industry experts on November 7-8 in New York City at the highly anticipated 5th Annual Stress Testing USA: CCAR & DFAST Congress. Join colleagues and peers to interact, network, discuss and debate best practice and experiences to drive the industry forward.

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