Estimating PPNR

Lourenco Miranda

In the previous chapters we presented the end-goal of the CCAR process. In this chapter, we will discuss its heart and soul: the PPNR. PPNR is indeed the most important part of the capital adequacy process, as it defines if the current state of the firm requires any capital action. We saw in Chapter 2 that the change in regulatory capital is equal to the change in equity capital minus deductions from regulatory capital plus other deductions. Change in equity capital equals to after-tax net income minus distributions to common and preferred shareholders. After-tax net income is equal to pre-tax net income minus taxes minus extraordinary items net of taxes minus change in the valuation allowance. Pre-tax net income is equal to PPNR plus any other revenue minus any provisions minus AFS/HTM securities losses minus HFS/FVO loan losses minus trading and counterparty losses. PPNR equals net interest income minus non-interest income minus non-interest expense (including operational risk losses).

Figure 5.1 illustrates the reverse engineering process described earlier, and how PPNR plays a role in it. In order to estimate the change in regulatory capital, the bank must estimate the