The Capital Plan
Risk Management Practices in the Context of CCAR
Capital Policy in the CCAR Framework
The Stress Scenarios
Credit Loss Estimation Methodologies
Operational Risk Stress Testing
Market Risk and Counterparty Credit Risk
Stress Testing for Insurance Companies
The International Perspective
Assessing Capital Adequacy and Capital Actions: Putting it All Together
THE CREDIT RISK PROBLEM
This chapter will analyse credit loss projections in a CCAR context. Credit risk is probably the most important of the exposures in the financial system. Although it is not as old as operational risk (as we will see in the next chapter), it does carry the most risk exposure to the firm. For that reason, we begin the loss projections with it. When does the credit risk start? After the loan is disbursed, in the case of a commercial bank for instance, what was initially a credit application becomes a credit exposure for the bank. The Bank will therefore start monitoring the exposure during the whole life of the loan.
This chapter will also explore how banks use a wide range of methods to estimate credit losses, depending on the type and size of portfolios and data availability. These methods can be based on either an economic loss approach (that is, expected losses, which is a function of three economic components) or an accounting-based loss approach (that is, charge-off and recovery).
A creditor charges-off a credit account when it is declaring debt as a loss for the bank, which means that the amount of debt is unlikely to be collected. Usually, credi