Stress Test and CCAR

Abstract

This chapter covers credit risk and capital modeling in stress test. While stress test is a broad topic, we will focus on some practical stress test frameworks – the regulatory stress test framework and the systematic stress test framework. As introduced in Chap. 1, the regulatory stress test framework was created due to the DFAST and implemented in the annual CCAR process for participant institutions. The systematic stress test framework is used by some larger institutions for their internal risk management purposes. In addition, a bottom-up risk integration framework like the conditional economic capital framework described in the previous chapter can also be used for stress test purpose, especially for reverse stress test. For all these frameworks, credit risk is one component, most often one critical component. We will illustrate how credit risk modeling is carried out in each of these frameworks, as well as how these modeling results are used in risk management and reporting.