Stress Testing Banks: DFAST/CCAR

Complying with the DFAST/CCAR requirements within an existing quantitative models and model risk management framework is one of the most daunting of the many recent challenges banks, Bank Holding Companies (BHC) and some Investment Holding Companies (IHC) currently face. The Dodd-Frank Act Stress Tests (DFAST) require all financial institutions with total assets above $10 billion to do stress tests on their portfolio and balance sheet. The Comprehensive Capital Analysis and Review (CCAR) is generally required to be completed once a bank’s total assets are above $50 billion. The objective of both exercises is to simulate a bank’s balance sheet performance and losses in a hypothetical severe economic downturn over the next nine quarters. Given this common objective, most risk managers consider and complete both exercises together.

Performance Testing: Benchmarking Vs. Back-Testing

When someone asks you what a model validation is what is the first thing you think of? If you are like most, then you would immediately think of performance metrics— those quantitative indicators that tell you not only if the model is working as intended, but also its performance and accuracy over time and compared to others. Performance testing is the core of any model validation and generally consists of the following components: Benchmarking Back-testing Sensitivity Analysis Stress Testing