United States

Capital plan review and stress tests: Becoming compliant and adding value

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As confidence in the U.S. economy increases following the financial crisis of 2007-08, banks of all sizes are grappling with enhanced regulatory demands. Local, national and global issues have the potential to affect bank operations, peers and stakeholders, underscoring the importance of robust risk management processes. Institutions must provide insight into their financial and operational preparedness to withstand these and other significant stress scenarios.  

One of the responsive guidelines with an impact on all banking and financial services organizations is the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). Since 2012, the Federal Reserve has required America's largest banks to conduct internally prepared Dodd-Frank Act stress testing (DFAST). This process is designed to assess whether banks and bank holding companies have sufficient capital to absorb losses in stressed economic conditions.   

Federal financial regulators (Federal Reserve, OCC and FDIC) have increased expectations for all institutions, regardless of size, to implement a comprehensive risk management framework that includes enhanced capital planning and stress testing. Even if standards do not currently apply to an institution, it can benefit from understanding the direction of regulatory change and developing a proactive approach to risk identification, measurement and mitigation.

Institutions that understand how to develop and implement value-added capital planning and stress testing programs are well-positioned to optimize capital and react efficiently to adverse events as well as new opportunities.  

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