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Stress Test and US Banks

27 Feb 2016

Stress Test and US Banks

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When everything is changing in this world then why not the style of learning. We won’t teach you the concepts individually but will teach you the few concepts altogether and with practical presence. So you will be able to grasp the concepts quickly and flourish in the field of risk management. Every risk management news article includes various key terms or important concepts which we will make you to understand practically and to remember forever. Read the Financial Times article titled “US banks to unveil stress test findings”  before and after learning below terms. The key risk management terms included in the article are:

CCAR

The Comprehensive Capital Analysis and Review is an annual exercise by the Federal Reserve to assess whether the bank holding companies (BHC) in the US have enough capital to run operations in times of economic and financial stress.

DFAST

Dodd-Frank Act Stress Testing is a complementary exercise to the Comprehensive Capital Analysis and Review. It is a forward looking quantitative evaluation of the impact of adverse conditions on BHC capital.

Midsized Banks

Mid-size banks are the banks with assets worth of between $10-$50 billion. There are 52 mid-size banks in the US and combined assets worth approx. $1 Trillion.

Reputational risk

It is the risk of loss resulting from the destruction to firm’s reputation. Reputation can be defined as a market perception for management and the financial stability of firm. It is not easy to identify and quantify the reputational risk.

Net Interest Margin

It is the ratio of net interest income to average interest earning assets. Net interest income is the difference between interest income and interest expense. The non-performing assets and net interest margin generally go hand in hand.

Tier one common equity

Common Equity Tier 1 capital consists of common shares, retained earnings, stock surplus, accumulated other comprehensive income and other disclosed reserves. Common equity tier 1 capital ratio (CET1 capital as a percentage of risk weighted assets) is most often used to measure bank’s capital strength. According to Basel III rule, a minimum CET1 ratio of 4.5% must be maintained by banks.

Stress Test

Stress test is described as the evaluation of a bank’s financial position under a severe but possible scenario. Stress test can be applied at individual institution or portfolio level.

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