Troubled Asset Relief Program: Bank Stress Test Offers Lessons as Regulators Take Further Actions to Strengthen Supervisory Oversight

GAO-10-861 Published: Sep 29, 2010. Publicly Released: Sep 29, 2010.

Highlights

The Supervisory Capital Assessment Program (SCAP) was established under the Capital Assistance Program (CAP)--a component of the Troubled Asset Relief Program (TARP)--to assess whether the 19 largest U.S. bank holding companies (BHC) had enough capital to withstand a severe economic downturn. Led by the Board of Governors of the Federal Reserve System (Federal Reserve), federal bank regulators conducted a stress test to determine if these banks needed to raise additional capital, either privately or through CAP. This report (1) describes the SCAP process and participants' views of the process, (2) assesses SCAP's goals and results and BHCs' performance, and (3) identifies how regulators and the BHCs are applying lessons learned from SCAP. To do this work, GAO reviewed SCAP documents, analyzed financial data, and interviewed regulatory, industry, and BHC officials.

Recommendations

Recommendations for Executive Action

Agency Affected	Recommendation	Status
Federal Reserve System	To gain a better understanding of SCAP and inform the use of similar stress tests in the future, the Chairman of the Federal Reserve should direct the Division of Banking Supervision and Regulation to compare the performance of the 19 largest BHCs against the more adverse scenario projections following the completion of the 2-year period covered in the SCAP stress test ending December 31, 2010, and disclose the results of the analysis to the public.	Closed – Implemented The Federal Reserve did not publish a comparison of the performance of the 19 largest bank holding companies against the more adverse scenario projections following the end of the 2-year period covered under the Supervisory Capital Assessment Program (SCAP). However, the Federal Reserve Board has decided to publicly disclose on an ongoing basis the actual and stressed performance of the largest 18 and 30 bank holding companies, starting with the 2013 annual Dodd-Frank stress test and the 2014 Comprehensive Capital Analyses and Review (CCAR), respectively. This ongoing disclosure of bank performance information is consistent with public statements made by members of the Federal Reserve's... View More
Federal Reserve System	To leverage the lessons learned from SCAP to the benefit of other regulated bank and thrift institutions, the Chairman of the Federal Reserve in consultation with the heads of the FDIC and Office of the Comptroller of the Currency (OCC) should follow through on the Federal Reserve's commitment to improve the transparency of bank supervision by developing a plan that reconciles the divergent views on transparency and allows for increased transparency in the regular supervisory process. Such a plan should, at a minimum, outline steps for releasing supervisory methodologies and analytical results for stress testing.	Closed – Implemented The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) required certain financial institutions to publicly disclose the summary results of stress testing performed by the institutions or the supervisor. In public statements by the Board's chair and a governor, the Federal Reserve has committed to expanding transparency of its supervisory process, building on the requirements of the Dodd-Frank Act. The Federal Reserve established in October 2012 expectations for transparency about methodologies used in a final rule about company-run stress tests required under the Dodd-Frank Act. The Federal Reserve noted the importance of having a consistent and transparent... View More
Federal Reserve System	To leverage the lessons learned from SCAP to the benefit of other regulated bank and thrift institutions, the Chairman of the Federal Reserve in consultation with the heads of the FDIC and OCC should develop more specific criteria to include in its guidance to examiners for assessing the quality of stress tests and how these tests inform BHCs' capital adequacy planning. These guidelines should clarify the stress testing procedures already incorporated into banking regulations and incorporate lessons learned from SCAP.	Closed – Implemented The Federal Reserve updated its supervision manual to include guidance to examiners for assessing the quality of stress tests conducted by bank holding companies. The manual now includes specific references to a May 2012 guidance, which describes elements of an effective stress test framework. The 2012 guidance was developed and released jointly with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. Specifically, the guidance is intended to emphasize the importance of stress testing as an ongoing risk management practice that supports banking organizations' forward-looking assessment of risks and better equips them to address a range of adverse... View More
Federal Reserve System	To leverage the lessons learned from SCAP to the benefit of other regulated bank and thrift institutions, the Chairman of the Federal Reserve in consultation with the heads of the FDIC and OCC should fully develop its plan for maintaining and improving the use of data, risk identification and assessment infrastructure, and requisite systems in implementing its supervisory functions and new responsibilities under the Dodd-Frank Act. This plan should also ensure the dissemination of these enhancements throughout the Federal Reserve System and other financial regulators, as well as new organizations established in the Dodd-Frank Act.	Closed – Implemented The Federal Reserve Board announced in April 2012 the formation of the Model Validation Council, consisting of independent experts. The council provides input on the Board's efforts to assess the effectiveness of the models used in the stress tests, improve the quality of the Federal Reserve's model assessment program, and strengthen the confidence in the integrity and independence of the program. In addition, the Federal Reserve has hosted since 2012 three annual conferences on stress tests, involving the participation of representatives from the Board and individual Reserve Banks as well as academics and bank holding companies. Discussions focused on the design and implementation of... View More
Federal Reserve System	To leverage the lessons learned from SCAP to the benefit of other regulated bank and thrift institutions, the Chairman of the Federal Reserve in consultation with the heads of the FDIC and OCC should take further steps to more effectively coordinate and communicate among themselves. For example, ensuring that all applicable regulatory agencies are included in discussions and decisions regarding the development, implementation, and results of multiagency activities, such as horizontal examinations of financial institutions.	Closed – Implemented The Federal Reserve, together with the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC), developed and issued guidance in May 2012 on stress testing for large banking organizations. The guidance is intended to emphasize the importance of stress testing as an ongoing risk management practice that supports banking organizations' forward-looking assessment of risks. In addition, the Federal Reserve System, along with FDIC and OCC, developed and released in March 2013 an interagency guidance on leveraged lending. This guidance outlines high-level principles related to safe-and-sound leveraged lending activities. These principles include... View More

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Audit oversightBank holding companiesBanking regulationCapitalEconomic stabilizationFederal aid programsFinancial institutionsFinancial managementFinancial regulationLending institutionsLessons learnedProgram evaluationTestingAssessmentsProgram coordination