Cart (0)
VIDEOThe Federal Reserve on SCAP
Highlights from the paper on its design and implementation.
 |
|
Page 1
Given the heightened uncertainty around the future course of the US economy and the potential losses in the banking system, supervisors believe it prudent for large bank holding companies (GHCs) to hold additional capital to provide a buffer against higher losses than generally expected, and still remain sufficiently capitalized over the next two years and able to lend to creditworthy borrowers should such losses materialize. The purpose of the supervisory capital Assessment Program (SCAP), which is being conducted by the supervisory agencies, is to assess the size of these capital needs.
The SCAP is a forward-looking exercise designed to estimate losses, revenues and reserve needs for BHCs in 2009 and 2010 under two macroeconomic scenarios, including one that is more adverse than expected. Should the assessment indicate the need for a BHC to raise capital or improve the quality of its capital to better withstand losses that could occur under more stressful-than-expected conditions, supervisors will expect that firm to augment its capital to create a buffer. This buffer would be drawn down over time if losses were to occur. In evaluating the SCAP results, it is important to recognize that the assessment is a “what if” exercise intended to help supervisors gauge the extent of additional capital needs across a range of potential economic outcomes. A need for additional capital or a change in composition of capital to build a buffer under an economic scenario that is more adverse than expected is not a measure of the current solvency or viability of the firm.
Page 2-3
The traditional role of capital, especially common equity, is to absorb unexpected losses and thus to protect depositors and other creditors. Given the heightened uncertainty about the economy and potential losses in the banking system, and the potential in the current environment for adverse economic outcomes to be magnified through the banking system supervisors believe it prudent for large BHCs to hold substantial capital to absorb losses should the economic downturn be longer and deeper than now anticipated. The SCAP was designed to assess these capital needs as part of the ongoing supervisory process. The program is consistent with current regulatory capital guidelines, which require BHCs to hold capital commensurate with their risks, and to generally hold a dominant share of the regulatory capital in the form of common equity.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
