How does the Fed's CCAR supervisory stress test actually work?

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AcadiFi · Accepted Answer

CCAR (Comprehensive Capital Analysis and Review) is the Federal Reserve's annual stress test for large US bank holding companies. The FR Y-14 data collection underpins it, and DFAST (Dodd-Frank Act Stress Testing) runs in parallel with overlapping but distinct outputs.

The cycle runs Q1 through June each year. In February, the Fed publishes three scenarios: baseline, adverse, and severely adverse — each specifying 28 macroeconomic variables (US GDP, unemployment, equity indices, 10 international economies, rates, credit spreads, real estate prices) for a nine-quarter projection horizon. Banks receive market shock and counterparty default scenarios for global market shock (GMS) firms.

Each bank runs projections using its own models for loan losses, PPNR, trading losses, and RWA. Submissions (the FR Y-14 schedules) go to the Fed in early April. The Fed simultaneously runs its own independent models. In late June the Fed publishes: each bank's projected CET1 ratio trough under severely adverse, the Stress Capital Buffer (SCB), and any qualitative objections (formerly).

The SCB, introduced in 2020, replaces the prior dividend restriction framework. SCB = max(CET1 starting ratio - CET1 stressed trough, 2.5%) + planned dividends as a share of RWA over four quarters. This becomes part of the bank's ongoing CET1 requirement. For Cypressbank with starting CET1 at 13%, trough 9.5%, dividends 0.5%: SCB = 3.5% + 0.5% = 4.0%.

FRM exam: know scenario count, SCB formula, and that CCAR is part of the Fed's Category I-IV tailoring framework.

How does the Fed's CCAR supervisory stress test actually work?

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