Adhering to Dodd Frank Act Supervisory Stress Testing
Post financial crisis US government has enacted an act 'Dodd-Frank wall street reform and consumer protection act. As per this act US bank holding companies with 50$ billion or more in consolidated assets, to conduct an annual stress test. Federal Reserve calculated its projections of a BHC's balance sheet, risk-weighted assets (RWAs), net income, and resulting regulatory capital ratios under these scenarios using data provided by the BHCs and a set of models developed or selected by the Federal Reserve.
These projections have to be done for nine quarters planning horizon based on three macro economic scenarios (baseline/adverse/severely adverse). It requires banks to calculate
1. PPNR from net interest income, non interest income and non interest expenses
2. Pre-tax net income from PPNR, Revenues, Provisions and Allowance for loan loss
3. After tax income from pre-tax net income and taxes
4. change in equity capital
5. change in regulatory capital
FED projects revenue, expenses and various types of losses and provisions that flow into pre-tax net income based on data provided by Bank Holding Companies with models developed by FED and validated by economists from FED. Banks also have to run their own stress tests with common stress scenarios and assumptions used by FED to help gauge the potential effect of stressful conditions on the ability of banking institutions to absorb losses while continue to act as credit intermediaries.
BHC's need to compare results of stress tests with scenarios of varying magnitude to improve decision making. Oracle financial services analytical application provides Stress testing as packaged analytical application to achieve all below.
1. Compare results of stress testing across multiple stress scenarios
2. FR Y-14 reporting with projections of PPNR, OTTI, Fair values under different scenarios (FR-Y14 Monthly/Quarterly/Annually)
3. Reporting of OCC DFAST 10-50B results schedule
With all these capabilities OFSAA Stress testing analytics will be an effective enterprise solution to accomplish dynamic regulatory requirements and provides forward looking quantitative evaluation of impacts of stressful economic conditions on BHC capital and capital decision making by management.
OFSAA Analytical application will also enable Bank holding companies to pull out regulatory reports of all magnitude scenarios, quickly respond to emergency business situations and also to cater to evolving regulatory requirements and reporting templates that may get introduced by regulatory bodies.