US financial institutions with $10 billion of assets or more must undergo stress testing as mandated by the Dodd Frank Act. Institutions with $50 billion of assets or more face an even more rigorous program, known as Comprehensive Capital Analysis and Review (CCAR) stress testing.
CCAR and Dodd-Frank Act Stress Testing (DFAST) exercises are performed periodically, and require financial institutions to produce forward-looking projections for credit losses, balance sheet/income statement and other variables, based on forward-looking scenarios for various macroeconomic variables. The projections must be mathematically appropriate and useful for business decision making. Models must be well-designed, validated, controlled, and fit for the specific purpose of stress testing.
Protiviti’s Model Risk team has performed a large number of model validations and model developments for models for stress testing, for a large proportion of institutions required to provide CCAR and DFAST submissions. Our work spans all relevant business units and purposes, including models used to project credit losses, revenues, income, allowance, risk-weighted assets, and other balance sheet items.
Because of our focus on quality, our work has been well-received by our clients and by the regulatory community.
Our areas of expertise:
Stress Testing Model Development
Protiviti has built stress testing models for several large U.S. Banks for both CCAR and DFAST stress tests. Protiviti, evaluated correlation between economic and bank specific input variables and risk metrics to develop models for stress testing projections
Stress Testing Model Validation
Protiviti’s model validation team has conducted model validation work for DFAST and CCAR models for operational risk, pre-provision net revenue, credit risk loss, allowance for loan and lease and losses and other models at several national and regional banks. Protiviti evaluated regression modeling and provided suggestions for model enhancements. Issues were noted with certain models requiring model updates prior to submission to the Federal Reserve Board and other national supervisors.
Stress Testing Internal Audit Support
Protiviti provides experiences internal audit SMEs for model risk management and stress testing. We have audited model development and validation controls across all model types, as well as stress testing process reviews spanning all years of CCAR and DFAST model submissions. We have identified issues with model risk management, credit risk modeling and operational risk modeling as well as recommendations to better address correlation between risk types.