As President and CEO of GFMI, I travel often and have the opportunity to hear questions from a variety of sources: asset managers, institutional investors, regulators, and bankers. One of the more frequent questions I hear is, “What’s the difference between CCAR and DFAST?” To help answer this question, one of GFMI’s regulatory experts, Rob McDonough, who also happens to be a former Fed employee, wrote an excellent summary comparing the two. This summary is presented as GFMI’s newest article Comparing and Contrasting CCAR and DFAST.
New Course: Capital Adequacy and Stress Testing
The recent financial crisis highlighted the need for significant reform in the way that financial institutions were regulated, both domestically and internationally. Earlier this year, Rob McDonough also developed a one-day course to provide participants with an overview of the importance of capital adequacy, capital planning, and stress testing. This course, Capital Adequacy and Stress Testing, reviews the current framework for measuring capital adequacy and stress testing at the largest and most complex financial institutions. It is divided into four sessions: Capital Adequacy, Comprehensive Capital Analysis and Review (CCAR), Dodd-Frank Act Stress Testing (DFAST), and Capital Planning.
In the Capital Adequacy session, participants learn about the key elements of capital adequacy after the financial crisis, including implementation of Basel III and the Dodd-Frank Act, Tier 1 capital ratio, total capital (Tier 1 and Tier 2) ratio, Tangible Common Equity Ratio, and leverage ratio. The also learn to evaluate the capacity of a bank’s capital to absorb different losses.
By the end of the CCAR session, participants are able to describe impact of CCAR on evaluating capital adequacy, internal capital adequacy assessment processes, plans to make capital distributions (such as dividend payments or stock repurchases), capital needs through a defined cycle (considering through the cycle capital needs and capital raising lead times), and the level of engagement with the Board of Directors and senior management in developing and reviewing the capital plan.
Throughout the DFAST session, participants learn about the impact of DFAST on capital adequacy planning (assessing whether institutions have sufficient capital to absorb losses and support operations during adverse economic conditions), liquidity and funding risk management, and market and interest rate risk management.
By the end of the Capital Planning session, participants are able to describe and summarize regulatory requirements and best practices for capital planning, the importance of an effective stress testing framework, the processes by which capital planning is incorporated into business decision and risk management processes, model risk governance procedures, governance over capital adequacy and stress testing models, and appropriate techniques to conduct risk assessments of capital planning.
If you are interested in learning more about this course or GFMI’s other regulatory courses, please contact us. We’d love to help!