Reviewing the 2016 CCAR & DFAST stress tests and looking towards 2017

Reviewing the 2016 CCAR & DFAST stress tests and looking towards 2017

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One of the Keynote speakers at last year’s Stress Testing USA: CCAR & DFAST Congress, Managing Director, Head of the CCAR Office at BMO Harris, Joseph A. Donat, outlines the top lessons learned for 2016 and how FIs can better prepare for 2017 tests.


Joseph currently runs the U.S. Capital Management teams and the CCAR Office at BMO Financial Corp (BFC). He coordinates the capital planning and CCAR/DFAST activities for the holding company and their U.S. bank subsidiary. He also has traditional capital management responsibilities, such as strategically managing capital for their U.S. legal entities. This entails providing advice and recommendations on the capital and funding implications of business initiatives, advising on capital impacts of structuring and funding activities, and capital assessments of acquisitions and divestitures. Previously,
he worked at the Federal Reserve Bank of Chicago in various leadership positions.
Most recently, he was the Central Point of Contact for a large banking Organization (>$50B) and managed onsite supervisory team.

Top lessons learned from the 2016 CCAR & DFAST stress tests

In 2016, we learned the importance 
of operational flexibility, as the Fed’s Supervisory Severely Adverse scenario was much more severe than prior cycles. This caused us to revise our BHC Stress scenario, re-estimate the impact to capital, and resubmit our scenario & related information through the governance process before
we began the execution process. The importance of strong controls, reasonably flexible systems, and efficient reporting (e.g. linked documentation) helped ensure the information was timely, accurate, and received appropriate challenge despite the very tight turnaround.

An overview of the 2016 scenarios and the curve balls that were included in the tests for this year

The 2016 CCAR scenarios were more severe than previous cycles. Notably,
the scenarios included negative rates for the first time, which could cause both strategic and execution challenges. Institutions had to make strategic decisions on how negative rates would impact various business activities, including whether the cost of negative rates would be passed on to institutional, commercial or retail customers. Additionally, negative rates provided operational challenges with systems, process, and models. The more severe scenario coupled with the negative rate environment was a curve ball that challenged operational capabilities at many firms.

How we can better prepare for 2017

The Federal Reserve continues to increase the scrutiny on the large
and complex (SR 15-18) institutions while providing some more relaxed expectations for the large and noncomplex firms (SR 15-19). Given the recent Notice of Proposed Rulemaking (NPR) on Amendments to the Capital Plan and Stress Testing Rules, the 2017 CCAR examination for SR 15-19 firms will likely be different in scope, rigor, and focus compared to the 2016 examination. I would recommend the management teams engage with their onsite supervisory team to discuss the changes to the examination process. The onsite teams will likely have more control over the process, scope, and results compared to previous cycles. Additionally, I would recommend that firms continue to make progress building stress testing into business- as-usual activities. Stress testing should leverage foundational risk management processes and frameworks and not be a separate, isolated process. Additionally, stress testing insights and other relevant learnings should be used to help better manage the business and understand how risks may evolve in different operating environments.

Regulatory expectations and changes, is there a light at the end of the tunnel?

Stress testing is here to stay and is a vital element of a sound risk management framework. However, the regulatory expectations for stress testing are evolving, with a clear delineation between large and complex firms and large and noncomplex firms. The NPR has provided more clarity on the future expectations and the examination process. As the Fed noted, most of the large and non- complex BHCs are meeting or close
to meeting supervisory expectations. Given the improvement for these firms,
I expect CCAR/DFAST expectations to moderate over the near-term and become less focused on only meeting regulatory expectations. I expect the focus will become more on strategic management of the firm. Bank management will still be responsible for developing a comprehensive capital planning process that fits into broader risk management framework and that is consistent with the risk-appetite and the strategic direction of the organization. Going forward, I expect bank management teams will focus on how to generate a higher return on significant CCAR investment to better manage the risk/return trade-off through the business cycle.

Our 6th annual Risk Americas 2017 Convention will be taking place on May 23-24 and will feature a dedicated track on the future of risk management. Register before the agenda is announced for the heavily reduced rate of only $999.

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