Preparing for the Stress Tests: Regulatory Timeline and Requirements
The Moody’s Analytics Regulatory Timeline provides a high-level overview of the stress testing regulations in both the United States and European Union in the immediate and medium-term. The US CCAR stress tests will expand over the next few years, requiring both large and mid-sized banks to develop processes and systems to support the tests.
Figure 1. Regulatory timeline
Source: Moody's Analytics primary market research and analysis
The US Stress Testing Requirements Guide is designed to provide a snapshot of the requirements in a simple-to-use framework. This tool is particularly helpful for stress testing exercise planning and highlights a few key trends related to stress testing regulations:
- Tests are becoming more comprehensive: Creating a need to forecast a wider range of risk and finance indicators
- The scope of the tests are broadening: Meaning that over time more banks are required to conduct annual internal and supervisory stress tests
- The frequency of the tests is increasing: Requiring quarterly calculations and semi-annual to annual reporting of stress testing results
- More transparency is required: Increasing disclosures by banks and SIFIs is required to meet market confidence objectives
Figure 2. US Stress Testing Requirements Guide
Source: Moody's Analytics
Sources and Notes
1 Applicable to 6 BHCs with large trading, private equity, and counterparty exposures from derivatives and financing transactions.
2 Planning horizon: December 31st year x through December 31st year x+2. Data as of September 30th year x for annual stress tests. Data as of March 31st year x for semi-annual stress tests.
3 The Fed uses BHCs’ planned capital actions, and assesses whether a BHC would be capable of meeting supervisory expectations for minimum capital ratios even if stressful conditions emerged and the BHC did not reduce planned capital distributions.
4 Each BHC maintains its common stock dividend payments at the same level as the previous year; scheduled dividend, interest, or principal payments on any other capital instrument eligible for inclusion in the numerator of a regulatory capital ratio are assumed to be paid; but repurchases of such capital instruments and issuance of stock is assumed to be zero.
Featured Experts
Laurent Birade
Advises U.S. and Canadian financial institutions on risk and finance integration, CCAR/DFAST stress testing, IFRS9 and CECL credit loss reserving, and credit risk practices.
Juan Manuel Licari
Dr. Juan M. Licari is a managing director at Moody's Analytics. Juan and team-members are responsible for the research and analytics that enable our quantitative solutions. The team helps our customers solve complex business problems; adding value through data and analytics.
Emil Lopez
Credit risk modeling advisor; IFRS 9 researcher; data quality and risk reporting manager
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Explores how North American financial institutions can leverage stress testing regulations to add value to their business, for compliance and beyond.
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