Mon, Aug 27, 2018
Definition
The U.S. Federal Reserve (Fed) introduced a regulatory framework to promote a safer and more stable financial system in the aftermath of the financial crisis of 2008. The Fed assesses whether large banks and financial institutions, referred to as Bank Holding Companies (BHC), have enough capital to absorb losses during stressful conditions, as well as whether they have an effective capital planning process. The Fed has set up an annual Comprehensive Capital Analysis and Review (CCAR) framework to perform the assessment of BHCs’ capital adequacy and capital planning.
Capital adequacy, capital planning and capital distribution arrangements are evaluated within the CCAR.
Failing the assessment will not only prevent the BHC from carrying out planned capital distributions without Fed approval, but the BHC will also be required to undergo changes to their business strategies or their organizational structure.
The CCAR process involves:
The number of supporting documents to be provided is extensive. These documents include policies and procedures related to the capital planning process, methodology documentation that describes the models and their validation, the key methodologies and assumptions for performing stress testing.
Main Challenges
Overview
The Dodd-Frank Act Supervisory Stress Testing (DFAST) process is a forward-looking quantitative evaluation of the impact of stressful economic and financial market conditions on various balance sheet indicators and other financial metrics. Through this process, the Fed assesses changes in the BHC’s capital ratio under a hypothetical set of stressful economic conditions established by the Federal Reserve.
The evaluation involves projecting the firm’s balance sheet, Risk-Weighted Assets (RWA) and net income over a nine-quarter planning horizon. These projections, along with capital action assumptions, allow the firm to predict changes in capital. “The approach followed take into account U.S. generally accepted accounting principles (GAAP) and regulatory capital rules.”
Main Challenges
Definition
The Internal Capital Adequacy Assessment Process (ICAAP) is part of the Basel II Accord, which aimed to improve risk management within banks. It is a framework that assesses whether the level of capital held by the firm adequately covers all material risks to which the institution is exposed. Therefore, as part of the process, firms must understand their inherent risk profile and identify and quantify all material risks.
Main Challenges
Kroll Offering
Kroll is an award-winning provider of compliance, regulatory consulting, risk management and valuation services focused on the financial services industry. We help clients build, manage and protect their businesses. Our global team of 300 professionals operates seamlessly across borders to provide clients with cross-jurisdictional advice and integrated expertise.
Based in key financial centers, we are closely connected with regulators and industry associations so that our clients have the best available information on regulatory requirements and trends.
The Duff & Phelps Prudential and Risk Management Consulting practice comprises a global team of former regulators, experienced consultants, risk and portfolio managers and front office quantitative analysts. They are industry practitioners with financial engineering, quantitative modelling, risk, regulatory and capital management expertise.
We have built and invested in best in class, and audit compliant, proprietary and industry standard risk analytic, capital risk management, regulatory finance and valuation tools, that are portable across various use cases (e.g., predictive credit risk models that can be used within an ICAAP and IFRS9 framework) and provide our clients cost-effective solutions.
Risk Analytic Solutions
Our Risk Analytic Solutions include credit, market, operational and other risk models that can be easily deployed or leveraged. Examples include:
ICAAP and Liquidity Risk Management Advisory
A capital risk management framework that supports adequate capital ratios, ensures liquidity adequacy, and articulates a well-defined recovery and resolution plan, is an integral part of a Prudential Risk Framework. Our capital and liquidity risk management services help our clients anticipate and optimize capital requirements, adapt to regulatory changes and assess capital impacts on financial forecasting and analysis, recovery and resolution planning, and within business development models. We provide clients various strategies to identify, measure and manage capital and liquidity risk.
Capital and Liquidity Analytics
Stress Testing Analytics
Recovery and Resolution Planning
Regulatory Reporting
Integrated Finance Analytic Solutions
The continuing evolution of capital standards globally, combined with the augmentation and convergence of finance and accounting regulation has meant that financial institutions need versatile and adaptable analytical solutions. Tools developed should be cross functional and leverageable across finance, risk and accounting, as the use cases dictate. Kroll’ Prudential Risk Management team has the ability to consult and deploy the following financial analytic solutions:
Portfolio Valuation Tools
Portfolio Optimization and Risk Management Tools
IFRS9 Credit Risk Modelling
List of abbreviations
COREP |
Common Reporting |
GABRIEL |
FCA online system to collect and store regulatory data from firms |
FINREP |
Financial Reporting |
FR Y forms |
Federal Reserve reporting forms |
IFRS |
International Financial Reporting Standards |
VaR |
Value At Risk |
ETL |
Expected Tail Loss |
PD |
Probability of Default |
LGD |
Loss Given Default |
EAD |
Exposure At Default |
PFE |
Potential Future Exposure |
EPE |
Expected Positive Exposure |
KVA |
Valuation Adjustment for regulatory capital |
CVA |
Credit valuation adjustment |
DVA |
Debit Valuation Adjustment |
FX |
Foreign Exchange |
Sources:
1 Federal Reserve Board, “Dodd-Frank Act Stress Test 2016: Supervisory Stress Test Methodology and Results” June 2016
Valuation of businesses, assets and alternative investments for financial reporting, tax and other purposes.
Heightened regulatory concerns and vigilance, together with increased investor scrutiny, have led to increased demand for independent expert advice.
The Kroll Financial Instruments and Technology practice is a leading solutions provider for asset managers, hedge funds, fund administrators, banks, insurers, private equity firms, commodity trading and investment firms, and corporations.