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.
Már Guðmundsson: Iceland’s crisis and recovery and the crisis in the eurozone Address by Mr Már Guðmundsson, Governor of the Central Bank of Iceland, in an international panel of bank governors on the European financial crisis and the Israeli economy, the Eli Hurvitz Conference on Economy and Society, Masada, Israel, 28 June 2012. *  *  *  Almost 90% of Iceland’s financial sector collapsed in the first week of October 2008, after its three private cross-border banks failed. In the panic that gripped global financial markets after the collapse of Lehman Brothers, these banks, like so many internationally active banks around the world, were faced with a wholesale run on their foreign currency liabilities and were therefore heading towards a default on those liabilities in the absence of lender-of-lastresort assistance in terms of foreign currency. However, given the size of the balance sheets involved (10 times GDP overall, with over two-thirds in foreign currency), it was impossible for the Icelandic authorities to provide this assistance on their own. Had the government made a full-scale attempt to save the banks, it would have been at serious risk of defaulting itself. The Icelandic banks’ failures were large by any criteria: the largest of them places 4th on the world list of corporate failures, and the three Icelandic banks combined rank 2nd, after Lehman. It was thus an event of systemic proportion in parts of Europe.