TODAY: The Effects of Post-Crisis Banking Reforms
Structural and Cyclical Macroprudential Objectives in Supervisory Stress Testing, by Beverly Hirtle
FULL REMARKS: nyfed.org/2K0QOLO #BankingReform
Structural and Cyclical Macroprudential Objectives in Supervisory Stress Testing, by Beverly Hirtle
FULL REMARKS: nyfed.org/2K0QOLO #BankingReform
“We are approaching the ten-year anniversary of the worst financial crisis in generations.” -Beverly Hirtle, EVP Research & Statistics @NewYorkFed #BankingReform
“Many regulatory and supervisory reforms have been made since” the financial crisis. -Beverly Hirtle, EVP Research & Statistics @NewYorkFed #BankingReform
“Today I want to focus on one post-crisis change, the introduction of supervisory stress testing, as embodied in Comprehensive Capital Analysis & Review (CCAR) & the stress tests required by the Dodd-Frank Act” -Beverly Hirtle, EVP Research & Statistics @NewYorkFed #BankingReform
“Supervisory stress testing and the CCAR are the most significant and impactful of the many regulatory and supervisory changes implemented following the global financial crisis.” -Beverly Hirtle, EVP Research & Statistics @NewYorkFed #BankingReform
“The CCAR and stress testing introduced a forward-looking perspective to capital adequacy and capital planning, something that static book-value-based regulatory capital measures lacked.” -Beverly Hirtle, EVP Research & Statistics @NewYorkFed #BankingReform
“We felt this acutely during the financial crisis, when market values of bank equity plunged while book values evolved only very slowly, based on accounting measures of losses.” -Beverly Hirtle, EVP Research & Statistics @NewYorkFed #BankingReform
“CCAR requires large complex banks to do systematic capital planning, including developing criteria for when dividends and share repurchases will be made, increased or curtailed.” -Beverly Hirtle, EVP Research & Statistics @NewYorkFed #BankingReform
“This is an important innovation, as banks were slow to reduce dividends during the financial crisis, even as losses mounted and share prices fell.” -Beverly Hirtle, EVP Research & Statistics @NewYorkFed #BankingReform
“The Supervisory Capital Assessment Program (SCAP) was a watershed moment in the financial crisis.” -Beverly Hirtle, EVP Research & Statistics @NewYorkFed #BankingReform
“SCAP was a program that used microprudential supervisory tools to achieve macroprudential objectives.” -Beverly Hirtle, EVP Research & Statistics @NewYorkFed #BankingReform
Microprudential objectives focus on the health, performance, safety and soundness of individual firms. This was the perspective that dominated supervision prior to the financial crisis. #BankingReform
Macroprudential objectives focus on the stability and performance of the entire banking and financial system, emphasizing links among firms, how their activities can interact and the impact of the financial sector on the broader economy. #BankingReform
“The macroprudential perspective has become more prominent since the global financial crisis.” -Beverly Hirtle, EVP Research & Statistics @NewYorkFed #BankingReform
Macroprudential objectives can be divided into two distinct groups:
-- Structural objectives
-- Cyclical objectives
-- Structural objectives
-- Cyclical objectives
Structural objectives aim to reduce the probability that a large institution fails, and resolution and recovery planning, which seeks to limit the damage in the event of failure. #BankingReform
Cyclical objectives focus on the build-up of risks during credit and asset price booms and the consequent pull-back in financial intermediation during periods of stress. #BankingReform
“Cyclical macroprudential goals motivate regulatory and supervisory tools that “lean against the wind” in good times and “lean into the wind” during stress.” -Beverly Hirtle, EVP Research & Statistics @NewYorkFed #BankingReform
“The primary goal [of SCAP] was to ensure that large banks had sufficient capital to withstand an even-worse-than-expected economic downturn and still be able to lend.” -Beverly Hirtle, EVP Research & Statistics @NewYorkFed #BankingReform
These elements made SCAP a successful macroprudential exercise: #BankingReform
Comprehensiveness was essential in achieving the SCAP’s macroprudential goals as the collective stress test results provided a view into a large share of the industry. #BankingReform
“The Dodd-Frank Act expanded the set of banking companies subject to supervisory stress testing to include all bank holding companies with assets exceeding $50 billion” -Beverly Hirtle, EVP Research & Statistics @NewYorkFed #BankingReform
“In 2018, a total of 38 firms participated in the CCAR and DFAST stress tests.” -Beverly Hirtle, EVP Research & Statistics @NewYorkFed #BankingReform
“With the recent passage of the Economic Growth, Regulatory Relief & Consumer Protection Act, many of these will no longer be subject to DFAST supervisory stress testing or could participate only on a periodic basis.” -Beverly Hirtle #BankingReform
“The very largest and most systemically important firms, including all domestic bank holding companies with assets exceeding $250 billion, will continue to be required to participate in DFAST supervisory stress testing on an annual basis.” -Beverly Hirtle #BankingReform
A consistent framework for assessing the vulnerability not just of the individual banking companies, but of the banking system as a whole. #BankingReform
Diverse perspectives, especially those from outside the banking industry and supervisory community, continue to be critical in supporting stress testing’s macroprudential objectives. #BankingReform
SCAP’s success as a macroprudential exercise was transparency, both of the process and, especially, of the results. #BankingReform
“SCAP was groundbreaking because it disclosed firm-specific supervisory estimates in detail, including loss amounts and rates on different types of loans, ...
... projections of net revenues, and the amount of capital each firm would have to raise to meet publicly disclosed supervisory targets ratios.” -Beverly Hirtle #bankingreform
“My co-author, Til Schuermann, has argued that increased reliance on supervisory models provides powerful incentives for banks to abandon innovation in stress test modeling and instead devote their energy to mimicking the Fed’s models.” -Beverly Hirtle #BankingReform
“The more stress test models are ‘hard coded’ in regulation, the more difficult it is to change them as modeling practices improve or as new risks emerge.” -Beverly Hirtle, EVP Research & Statistics @NewYorkFed #BankingReform
“The Fed has proposed additional disclosures about its stress test models, including indicative loan loss rates and loss results based on standardized portfolios.” -Beverly Hirtle, EVP Research & Statistics @NewYorkFed #BankingReform
“These enhanced disclosures aim to provide greater insight into the Fed’s modeling approaches and thus to facilitate “peer review,” while maintaining the rigor of the stress testing regime.” -Beverly Hirtle, EVP Research & Statistics @NewYorkFed #BankingReform
SCAP needed to have clear and predictable objectives and actions. #BankingReform
“The financial crisis environment gave SCAP a very clear goal of providing confidence that the banking system could continue to lend even under more dire economic conditions as a way of mitigating the chance that those dire economic conditions actually materialized”#BankingReform
“Ensuring that the largest and most systemically important banks do robust capital and liquidity planning, have strong internal controls, ...
... do good risk identification and have very healthy amounts of capital (especially common equity) and liquidity resources is fundamental to fostering a stable banking system.” -Beverly Hirtle, EVP Research & Statistics @NewYorkFed #BankingReform
FULL REMARKS: nyfed.org/2K0QOLO #BankingReform
