While the stress testing element was only part of the CCAR review, it was an important input into evaluating banks’ capital planning. The assessment was conducted between November 2010 and March 2011. Once again the largest 19 U.S. domiciled bank holding companies were asked to participate, using a baseline scenario, their own stress scenario, and a supervisor-provided stress scenario (a set of macroeconomic assumptions consistent with an economic downturn). A critical benchmark was whether banks could meet a 5 percent Tier 1 common capital ratio under stress conditions over the next two years, assuming they paid dividends or carried out the stock buybacks as they proposed. Additional capital measures were examined, including the ability to satisfy over time the new Basel III capital ratios and changes in capital required by the Dodd-Frank legislation. Bank holding companies were required to provide information on their capital adequacy processes and capital distribution policies, and supervisors assessed them. Conducting the analysis for all of these institutions simultaneously gave supervisors a good benchmark as to how the financial institutions were performing relative to a stress scenario. In addition to providing a method for evaluating capital assessments, the stress test that was one component of the broader CCAR provided an opportunity to determine how financial institutions had refined their ability to conduct stress tests and incorporated lessons learned from the SCAP. In that vein, these types of capital assessments are likely to be an important tool in understanding the capital planning process in the future.
Bank regulation and bank supervision – not to mention management practices within financial institutions – all need to continue to evolve to ensure that during periods of economic or financial distress, organizations remain well capitalized so their role in credit intermediation is not disrupted. I hope the analysis and observations I have shared today can assist with a process of learning, evolving, and improving that will prevent future disruptions. Thank you. 6  BIS central bankers’ speeches  BIS central bankers’ speeches  7  8  BIS central bankers’ speeches