3326_3600_Stress Tests and Lessons Learned from the Financial Crisis - 19June09 - Schuermann_presentation by chenmeixiu

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									The Supervisory Capital Assessment Program:
Motivation and Results for the Bank Stress Test
  Til Schuermann*

  PRMIA CRO Summit, NYC, 19 June 2009




* Any views expressed represent those of the author only and not necessarily those of the Federal Reserve Bank of New York
   or the Federal Reserve System.
Motivation of the SCAP
   Supervisory Capital Assessment Program (SCAP)
      Supervisory exercise to determine the amount of capital needed to ensure bank holding
       companies (BHCs) remain well-capitalized even in a stressed economic environment
      “What-if exercise”, not a solvency test



   Part of U.S. Treasury’s “Financial Stability Plan”
        Joint effort between Fed, FDIC, OCC, and Treasury


   Goal is to reduce likelihood of a “more adverse” outcome
      Less uncertainty about banking sector health generates investor and counterparty
       confidence
      More capital now to absorb possible future losses makes BHCs more willing to lend




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The SCAP Capital Buffer




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What the SCAP Actually Did
   Examine 19 BHCs simultaneously
        Two-thirds of assets and half of loans of U.S. banking system


   Estimate two-year forward projection of losses, resources, and capital
    needs under two macroeconomic scenarios
      “Baseline”
      “More Adverse”



   Assess level and composition of capital
      Tier 1 capital composed of common equity and certain types of preferred
      Composition question focuses on amount of common equity in Tier 1



   Do banks have “buffer” large enough to absorb losses in “more adverse”
    scenario and still meet target capital ratios?
      Tier 1 capital / Risk-Weighted Assets > 6%
      Tier 1 Common capital / Risk-Weighted Assets > 4%



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Macro Scenarios




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Macro Scenarios




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Macro Scenarios




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Summary of Results
   Aggregate results for the 19 BHCs participating in the SCAP in the more
    adverse scenario
      Projected losses of $600B
      Projected resources to absorb losses of $360B
      Net capital need of $185B
         $75B after capital actions



   BHC-specific results
      10 BHCs identified as needing additional capital
      Considerable variation in losses, revenue, and capital needs across BHCs




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    Losses by Type in the More Adverse Scenario
                               Aggregate Projected Losses ($B)

   $600B in total losses
        8 categories




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    Losses by Type in the More Adverse Scenario
                                       Aggregate Projected Losses ($B)

   $600B in total losses
        8 categories

   $240B real estate-related losses
        40% of total




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    Losses by Type in the More Adverse Scenario
                                              Aggregate Projected Losses ($B)

   $600B in total losses
        8 categories

   $240B real estate-related losses
        40% of total

   $100B trading-related losses
      15% of total
      5 BHCs with large trading portfolios
      Drivers:
          Counterparty
          Private equity
          Traded credit products




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High Loan Loss Rates by Historical Standards




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Differentiation across BHCs
   Wide variation in losses and revenue due to
       Business lines and exposure
          Real estate vs. consumer vs. processing vs. trading




                                                                 13
Total Loss Rates varied from 3% to 12%




             Note: Loss rates are before purchase accounting adjustments.
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Differentiation across BHCs
   Wide variation in losses and revenue due to
           Business lines and exposure
              Real estate vs. consumer vs. processing vs. trading



   Variation within loan categories due to
           Portfolio characteristics
            - Vintage, FICO, LTV, and geography
            - Loan type such as prime, Alt-A, or sub-prime
           Underwriting standards




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First Lien Mortgage Loss Rates Varies from 3% to 12%




               Note: Loss rates are before purchase accounting adjustments.
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SCAP Capital Needs
   10 of 19 BHCs identified with a need for a “capital buffer” in the more
    adverse scenario
      $185B in total need
      Typically reflected need for more common equity



   Existing “capital actions” reduced the SCAP capital need
      Examples
         Exchange offer that converts preferred equity to common
         Mandatory conversion of preferred equity to common
         Contracted sale of businesses or assets
         Strong 1Q 2009 revenue that added to retained earnings
      Remaining need of $75B in new equity




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What did the Market Think?




   Source: Markit            18
Why did it (seem to) work? Why was it credible?
   Disclosure
     More than ever before on supervisory exercise
     Details on loss projections, rather than loss realizations
     Details on supervisory approach



   Uncertainty reduction
     “Convert” uncertainty into risk
     Bound the size of the problem
     Bound likely govt action




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Post-SCAP Capital Raises
   SCAP Plan
     BHC capital plan submitted to supervisors by June 8, 2009
     BHC capital raises to be completed by November 8, 2009




   So far, BHCs increased common equity by $81B since SCAP
     But, all SCAP buffers not met yet
     Some capital raised by BHCs without SCAP need




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TARP Repayment
   Troubled Asset Relief Program (TARP)
     U.S. Treasury invested ~$200B in these 19 BHCs since October 2008
     Many BHCs want to repay TARP to avoid government intervention, oversight,
      compensation restrictions, etc.


   Fed provided guidance for TARP repayment on June 1, 2009
     Ability to continue to lend to creditworthy households and businesses
     Sufficient capital and liquidity
     Access to long-term debt without reliance on Temporary Liquidity Guarantee Program
     Access to public equity markets



   TARP redemption approval announced on June 9, 2009
     All 8 BHCs without SCAP need and TARP have raised common equity
     $67B expected to be repaid (including Morgan Stanley)




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Conclusions
   Initial public policy objectives of SCAP met so far
      Increased confidence in major U.S. BHCs and U.S. financial system
      $81B of new common equity for the 19 SCAP BHCs



   But, too early to declare victory
      Macro risks
         Macro outlook remains uncertain despite “green shoots”
         Unclear how BHCs will perform during a prolonged recession or slow recovery
      BHC risks
         Some BHCs need to raise additional capital
         BHC capital remains low by historical standards



   Promising start, but much work to do




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            Thank You!
http://nyfedeconomists.org/schuermann/




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Graveyard




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                              SCAP and the Financial Crisis




Note: Weekly data normalized to 6/6/08. All dates are f rom FRB or UST press releases.

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Methods for Projecting Losses and Revenue
   Basic calculation
                      Kt+1 = Kt + Resources – Losses – Dividends

   Resources to absorb losses
      Revenue after operating expenses, but before credit costs
      Reserve release / build by the end of 2010 for expected losses in 2011



   Project losses on
      Loan portfolios – cash flow losses
      Securities held for investment – accounting recognition of market losses
      Trading portfolios (including derivatives) – mark to market shock



   Calculate impact on regulatory capital based on supervisors’ estimates
      After taxes
      After preferred dividends

   Compare to capital ratio targets to assess any needed capital buffer
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Identified Capital Need for 10 of 19 BHCs

    No Capital Need               Identified Capital Need

        American Express        Bank of America   $33.9B
        BB&T                    Citigroup          $5.5B
        Bank of NY Mellon       Fifth Third        $1.1B
        Capital One             GMAC              $11.5B
        Goldman Sachs           KeyCorp            $1.8B
        JPMorgan Chase          Morgan Stanley     $1.8B
        MetLife                 PNC                $0.6B
        State Street            Regions            $2.5B
        US Bancorp              SunTrust           $2.2B
                                 Wells Fargo       $13.7B
                                  Total             $74.6B




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$59B New Common Equity since SCAP for BHCs
      with an Identified Capital Need …




 Note: Capital estimates as of June 11, 2009. Include expanded exchange conversion for Citigroup.
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… and $22B New Common Equity for BHCs without
           an Identified Capital Need




  Note: Capital estimates as of June 11, 2009. Include expanded exchange conversion for Citigroup.
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