Fed Chair Bernanke on the Lessons of SCAP "Stress Tests"
In the keynote address on the opening day of the Atlanta Fed's Financial Markets Conference, Federal Reserve Board Chairman Ben Bernanke detailed how the federal banking supervisory agencies conducted the Supervisory Capital Assessment Program (SCAP), also known as stress tests of the nation's 19 largest banking companies.
Capturing a broad snapshot
Banks initially submitted estimates of expected losses and revenues, then supervisors evaluated those submissions for omissions, overly optimistic assumptions and other issues, Bernanke said. Detailed conversations with bank managers resulted in numerous corrections and modifications of the 19 banks' reports.
Judgments, models used in tests
"For example, we used statistical models to estimate residential mortgage losses at firms based on loan data submitted by the firms as part of the exercise," Bernanke said.
Recommended capital buffers "appropriately conservative"
Specifically, the SCAP's estimated two-year cumulative losses on total loans under the review's more adverse scenario averaged 9.1 percent across the 19 companies, a higher rate than in any two years dating to 1920, including the worst years of the Great Depression.
One of the goals of SCAP is to increase confidence in the nation's financial system. While initial indications are positive, the ultimate success of that will not be known for some time, Bernanke pointed out. It is already clear, however, that banking supervisors can use lessons learned in SCAP to improve their processes.
"In particular," Bernanke noted, "the supervisory capital assessment has demonstrated the benefits of using cross-firm, cross-portfolio information and the simultaneous review of a number of major firms to develop a more complete and fine-grained view of the health of the banking system."
May 13, 2009