Fed's 2013 stress testing scenarios less severe: CRISIL GR&A

Nov. 19, 2012 - PRLog -- The US Federal Reserve's (Fed) 2013 stress testing scenarios for US banks announced on November 15, 2012 are likely to be less stringent for banks, especially for those with a greater US presence, concludes a study by CRISIL Global Research & Analytics (GR&A). The analysis compares the scenarios that the top 30 US-domiciled bank holding companies (banks) need to use for carrying out their 2013 stress tests submissions with the 2012 scenarios.

The impact on stress test outcomes in 2013 for individual banks will vary significantly. Says Sanjeev Sinha, President, CRISIL GR&A, “In general, US banks with a lower exposure to the Euro region and Asia are relatively better placed under CCAR-2013. Also, since the scenarios assume a sharp drop in housing and commercial real estate prices for the next 10 quarters, banks with a higher exposure to mortgage and securitized assets are likely to face more adverse outcomes.”

The Fed’s scenarios specify assumptions for a range of macroeconomic parameters in US and other regions. The Fed requires three scenarios under the Comprehensive Capital Analysis and Review (CCAR) 2013 – “supervisory baseline”, “supervisory adverse” and “supervisory severely adverse” compared to two under CCAR-2012. It has also provided greater transparency on the methods employed to generate the above scenarios. Of the three supervisory scenarios, CRISIL GR&A has analyzed the “supervisory severely adverse” scenario and compared to the “supervisory stress” scenario in CCAR-2012. Says Mr. Sinha, “Our analysis contains a one-to-one comparison of the 13 quarter projections of each of the 26 CCAR macroeconomic parameters in CCAR-2013 and CCAR-2012”. For this comparison, CRISIL GR&A has used a key statistical measure “Spread Average” defined as the average difference in spreads for each variable over 13 quarters between CCAR-2013 and CCAR-2012.

For the US, the CCAR-2013 assumptions across all major macroeconomic parameters are more favorable. Explains Anshuman Prasad, Director, Risk & Analytics, CRISIL GR&A, “Central to the assumptions for US is the Fed’s approach of using unemployment rate as the primary parameter in specifying stress scenarios. Lower unemployment rate projections in CCAR-2013 and their cascading effect on other parameters will likely have a positive impact on the stress testing outcomes.” There is a positive “spread average” in key asset price variables like House Price Index, Dow Jones Total Stock Market Index and the Commercial Real Estate Price Index in CCAR-2013 scenarios over CCAR-2012. Similarly, the 10-year Treasury yield and 30-year Mortgage rates assumed in CCAR-2013 are, for most quarters, below their corresponding CCAR-2012 equivalents leading to favorable stress outcomes for the banks. However, the BBB corporate bond yield values under CCAR-2013 are above their CCAR-2012 equivalents during the last 9 quarters of the analysis, suggesting higher risk in corporate exposures of banks.

Outside the US, however, for the 4 international regions - Euro area, Japan, UK and developing Asia, assumptions for macro-variables have become far more severe in CCAR-2013 including weaker real GDP growth and weaker Euro currency. The downturn assumed in developing Asia is more acute, underpinned by a sharply weakening Chinese economy.

The detailed analysis is available at www.crisil.com/gra/ccar-2013.

CRISIL GR&A has released a report titled ‘A comparative analysis of the US Federal Reserve’s CCAR 2013 & 2012 scenarios’. CRISIL GR&A is hosting a media teleconference today, November 19, 2012, to provide a briefing on its analysis:

London - 2.30 pm GMT
New York - 9.30 am EST
Mumbai - 8 pm India time

The teleconference will be hosted by:
Roopa Kudva, MD & CEO, CRISIL
Sanjeev Sinha, President, CRISIL Global Research & Analytics

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About CRISIL Limited
CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services.
We are India’s leading ratings agency. We are also the foremost provider of high-end research to the world’s largest banks and leading corporations. With sustainable competitive advantage arising from our strong brand, unmatched credibility, market leadership across businesses, and large customer base, we deliver analysis, opinions, and solutions that make markets function better.
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About CRISIL Global Research & Analytics
CRISIL Global Research & Analytics (GR&A) is the world's largest and top-ranked provider of high-end research and analytics services. We are the world's largest provider of equity and credit research services. We are also the foremost provider of end-to-end risk and analytics services to trading and risk management functions at the world's leading financial institutions and corporations. We operate from research centers in Argentina, China, India and Poland, working with our clients across several time zones and in multiple languages. Being part of CRISIL enables us to attract and retain top-quality talent. We have over 2,300 employees, 75 per cent of whom hold advanced degrees in finance, accounting and management. We employ the largest number of CFAs and CFA aspirants in India. For our robust talent development practices and compelling employee value proposition, we won top honors at the NASSCOM Exemplary Talent Practices Award (NExT Practices) for Skill Enhancement and special recognition for the ‘Talents Magnet Category’ in 2011 and 2012 respectively. The award recognizes us as a firm that has the vision to proactively invest in its people and get them future-ready. We are committed to delivering cutting-edge analysis, opinions, and solutions. This underscores our proposition of being the best people to work with.

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