Primatics Stress Testing Webinar
How to Execute Dodd Frank Act Stress Test for
Midsize Banks ($10B - $50B)
John Lankenau
Vice President, Product Management
Agenda
• Primatics Overview
• Planning a DFA Stress Test
• Execution of DFA Stress Test
• Submission and Beyond
8/22/2013
2
Primatics Overview
Primatics’ mission is to help banks
and financial institutions evolve. We
provide an enterprise-grade SaaS
solution for accounting, valuation
and compliance of loan portfolios
•
•
•
•
We focus on loan portfolios – the
core business of banks
We currently have 50+ customers
across all asset sizes, including
over 15 Tier 1 ($10B+) financial
institutions
8/22/2013
Performing and Non-performing GAAP Accounting
•
Acquired Books
•
Accounting Forecasting (CCAR, DFAST)
•
Disclosures
Finance
•
Disclosures
•
Investor Relations
Report
Our solution, Evolv, empowers
banks’ users to comply with
regulations, manage complexity
and make better decisions
We provide a SaaS (Software-asa-Service ) Solution with best-inclass security, flexibility and
business scalability
•
Credit Admin
Reporting
•
CFO Dashboard
•
Custom Management
Reports
•
Executive
Management
Risk
•
Reserving Process
•
Loss Forecasting
•
TDRs
•
Loan Reviews
Stress Testing
(CCAR, DFAST)
3
Stress Testing Webinar Series
•
June 2013
Today
Oct 2013
Challenges & Best Practices
for DFAST 10 –50
How to Execute DFAST
Modeling Approaches for
DFAST
Respond to the challenges of
the Dodd Frank Act Stress
Test for Midsize Banks and
adapt the best practices
•
Consider practical aspects
while executing Dodd Frank
Act Stress Test for Midsize
Banks
•
Discuss varying modeling
approaches for DFAST for
Midsize Banks and beyond
The webinar video recording and presentation materials will be available at:
www.primaticsfinancial.com/knowledgecenter
8/22/2013
4
How to Execute Dodd Frank
Act Stress Test for Midsize
Banks ($10B - $50B)
John Lankenau
Vice President, Product Management
Establishing Scope
Components of a DFA Stress Test
Controls,
Oversight,
Documentation
Quantitative
Results
8/22/2013
Qualitative
Results
6
DFA Stress Test Requirements Highlights
• Controls, Oversight, Documentation
 Establish and maintain a system of controls, oversight, and documentation
 Establish policies and procedures for DFA stress tests and ensure compliance
 Have effective model risk management practices to include model validation
• Quantitative Results
 Directly and separately estimate credit losses for loan portfolios and securities holdings
 Report projections of losses, PPNR, balance sheet, RWA and Capital
 Generate GAAP compliant ALLL forecast including losses projected beyond the 9-quarter horizon
• Qualitative Results
 Provide an explanation of the drivers behind changes in capital
 Describe the types of risks included in the exercise
 Document methodologies used, data types and key assumptions
8/22/2013
7
Planning & Executing a DFA Stress Test
Planning
Staging
10/7
Quantitative
Execution
11/15
Qualitative
Analysis
1/31
Submission
2/28
3/31
Typical Timeline
8/22/2013
8
Planning Phase – Project Components
Planning
10/7
●
Quantitative
Execution
Staging
11/15
1/31
Qualitative
Analysis
2/28
Submission
3/31
Establish organization structure
 Cross Functional
 Centralized Planning
 Distributed Execution
●
●
Create a project plan
Create documentation framework to capture decisions and assumptions as
they are made
8/22/2013
9
Planning Phase – Process Components
Planning
• Map Out Stress Testing Framework
 Select modeling approaches for each portfolio
 Define data requirements
 Map systems and data flow
 Key Assumptions
8/22/2013
10
DFAST Framework
Planning
Income Statement Template
DFAST Template Requirements (Income Statement)
Idiosyncratic
Non-interest income and
expense
All other gains (losses)
Taxes
Memo item: Net gains
(losses) on OREO
Memo item: Total OTTI
losses
Interest Rate Sensitive
Loan Portfolios
Realized gains (losses) on HTM
securities
Provision for loan and lease losses
Realized gains (losses) on HFS
securities
Forecast of loan charge-offs, by segment
Net interest income
(Interest income on securities and
trading assets, Interest on
deposits)
Spreadsheets
Net interest income
(Interest and fee income on loans)
Specialized Solutions
Typical ALM Capability
Complexity Curve
8/22/2013
11
DFAST Framework
Planning
Sample Data Flow
Spreadsheets
ALM System
Specialized Loan
Solution
Spreadsheets
Spreadsheets
Spreadsheets
Spreadsheets
Staging
Spreadsheet
Templates
Spreadsheets
Spreadsheets
Spreadsheets
Spreadsheets
(FR Y-16A/DFAST 10-50)
8/22/2013
12
Planning
DFA Stress Test Template Income Statement Inputs
Item
Source System for Input
Staging?
Specialized Loan
No
Net Interest Income
ALM, Specialized Loan
Yes
Non Interest Income
Spreadsheet
No
Non Interest Expense
Spreadsheet
No
Specialized Loan
No
Realized Gains (Losses) HTM
Securities
ALM, Spreadsheet
Yes
Realized Gains (Losses) AFS
Securities
ALM, Spreadsheet
Yes
All Other Gains (Losses)
Spreadsheet
No
Taxes
Spreadsheet
No
Loan Net Charge-Offs by Portfolio (13
Items)
Provision for Loan and Lease Losses
8/22/2013
13
DFA Stress Test Template Balance Sheet Items
Item
System
Loan Balances by Portfolio
Specialized Loan
Allowance for Loan and Lease Losses
Specialized Loan
Securities (HTM + AFS)
ALM
Trading Assets
ALM
Other Intangible Assets
Spreadsheet
OREO
Spreadsheet
Other Assets
ALM
Funding (Retail + Wholesale)
ALM
Trading Liabilities
ALM, Spreadsheet
All other Liabilities
ALM, Spreadsheet
Capital Items
8/22/2013
Planning
Template Roll Forward and Dividend Plan
14
Stress Testing a Loan Portfolio
1
Create Position
Import Existing
Portfolio Positions
3
4
Generate Cash Flows
and Loan States
Generate Future
Business positions
2
Planning
Define Scenarios
5
Business Intelligence
Accounting
Forecasting
Accounting Results
Models
Define Forecast
Assumptions
Forecast Provision
Accounting Results
Economic Results
Forecast Modules
Cash Flow
Algorithms
FAS91 (ASC 310)
FAS5 (ASC 450)
FAS114 (ASC 310)
SOP03-3 (ASC 310)
TDR
Define
Macroeconomic
Scenarios
Forecast Interest
Income
Scenario Analysis
Regulatory Data
Define Management
Actions
1
Data Capture
3
Loan Modeling
2
Scenario Definition
4
Accounting Forecasting
8/22/2013
5
Reporting / Analysis
15
DFAST Framework
Planning
• Model Selection - General Model Choices
 Structure: Roll Rate, Net Charge-off, Transition Matrices or Expected Loss
• All structures are viable but must be constructed to be sensitive to macroeconomic inputs
• Guidance recommends evaluating each approach to determine best fit based on complexity and
materiality of each portfolio
 Class: Loan Level, Loan-Segment Level or Portfolio Level
• Loan-level models are more complicated but give better risk driver segmentation
• All classes generally viable; smaller institutions especially may want high-level models
 Data: Industry or Bank
• Bank data is valuable when there is sufficient loss history and adequate history reflective of current
portfolio
 Source: Internally Developed or Vendor
• Internally developed models can provide greater insight into risks faced but require significant resources
to build, validate and document
• Vendor models must still comply with sound model risk management practices
8/22/2013
16
Staging Phase
Planning
Quantitative
Execution
Staging
10/7
11/15
1/31
Qualitative
Analysis
Submission
2/28
3/31
• Establish baseline forecast and obtain stakeholder agreement




Composition of new business
Impact of baseline assumptions on forecast
Generate accounting forecast
Time permitting, test sensitivity of accounting forecasts to macroeconomic inputs
8/22/2013
17
Quantitative Execution and Qualitative Phases
Planning
Quantitative
Execution
Staging
10/7
11/15
1/31
Qualitative
Analysis
2/28
Submission
3/31
• Finish execution of quantitative portion of stress tests and have understanding
of risk drivers
 Estimates made for all items and templates filled out for all scenarios
 Documentation of assumptions, process and results well underway
 Few, if any, open questions about results
8/22/2013
18
Sample Results
Quantitative
Execution
Qualitative
Analysis
Understand drivers of risk across portfolios
8/22/2013
19
Submission
Finalize Submission
Compile the components to complete your narrative
Controls,
Oversight,
Documentation
Quantitative
Results
8/22/2013
Qualitative
Results
20
After submission
• Take a couple of days off and pat yourself on the back
• Perform bank-specific stress testing
• Further improve stress testing capabilities in preparation for DFAST 2015
8/22/2013
21
Q&A
• Share results of the polling questions
• Send questions through chat to David Arnold or through Q&A window
8/22/2013
22
Contact
John Lankenau
Vice President of Product Management
8401 Greensboro Drive, Suite 300
McLean, VA 22102
[email protected]
This document is protected under the copyright laws of the US and other countries as an unpublished work. This document contains information that is proprietary and confidential to
Primatics Financial LLC, and by accepting receipt of this document the recipient agrees not to disclose, or to otherwise duplicate or use, this document or its contents in whole or in part
for any purpose other than in connection with services or deliverables to be delivered by Primatics Financial LLC. Any use or disclosure in whole or in part of this information without the
express written permission of Primatics Financial LLC is prohibited.
© 2013 Primatics Financial LLC – All rights reserved.
23