The Supervisory Capital Assistance Program-Part XXI

This is the twenty first and the concluding part of the series of articles on SCAP.

Determination of Capital Needs(contd):  As seen throughout the SCAP exercise, the supervisors did not depend on a single tool, or measure to go about their job of determining the capital required for the participating BHCs.  

They made a comparitive study of the figures submitted by the firms against different, but relevant measures, and standards.   Wherever it was felt that these figures did not gel in with their own findings and not in keeping with the overall macroeconomic conditions for which they were expected to gear up to, the supervisors did not hesitate to make necessary changes, as they saw fit.   That apart, they also innovated several proprietary measures and standards to eliminate the risks of miscalculations and to ensure conformity of the exercise to the guidelines laid down for it.  

Supervisors examined several indicators of capital adequacy like pro form capital and Tier I capital, including its various components.   For instance, Tier I capital, as per the Board’s risk based capital adequacy guidelines, is made up of common and non-common equity elements.   Some of these components like Innovative Perpetual Debt Instruments, are subject to limits on their inclusion in Tier I capital.  

Some of the elements that make up the Tier I capital are common stockholders’ equity, qualifying perpetual preferred stock, certain minority interests, and trust preferred securities.   A trust preferred security is one that has characteristics of both a equity and debt issue.Intangible assets like goodwill and deferred tax assets are either included in Tier I capital upto a certain limit or not included at all.

Common equity is preferred by the supervisors as the dominant component of Tier I capital.   Existing capital adequacy guidelines prefer voting common stockholders’ equity to be the major part of Tier I capital.   Hence the requirement laid down by the supervisors, of having a dominant part of the Tier I capital, is consistent with extant regulations.  

As such, the supervisors cannot be seen to be recommending the introduction of a new capital standard.   The result of the above analysis and assessment provided a clue to the initial estimates of the capital needs of the firms.   This would enable them to be properly capitalized even in the more adverse scenario.  

Supervisors conveyed the initial assessment of the capital needs of the BHCs, after the above exercise.   The final assessment would include the actual results year to date including 2009 Q1 operating performance, and other corporate activities, such as, sale of specific assets, or businesses or capital events, such as, the new issuance of equity securities.

Supervisors evaluated the above information in terms of safety and soundness of the 19 BHCs, and also the stability of the broader financial system.   They tried to execute their mandate in the best possible way, employing all sorts of tools and measures, checking and cross-checking the veracity of facts and figures, calling for additional information where the submissions were inadequate.

                                                                                                          Concluded.

Acknowledgement:  Adapted from the official document of the Board of Governors of the Federal Reserve System.

The Supervisory Capital Assistance Program-Part XX

This is the twentieth in a series of articles on the SCAP.

Determination of Capital Needs:  The SCAP exercise was initiated in the wake of Bank failures and the recessionary trends that followed it, in the United States and other advanced countries.   The purpose of the exercise was to determine the level of capital required to be maintained by the 19 large BHCs, that accounted for two thirds of the assets held by the U.S. Banking industry, and one half of all the loan exposures.

In the above connection,the 19 BHCs submitted projections for their Tier I capital, and common stockholders’ equity for the year end 2009 and 2010.   Tier I capital is made up of the paid up capital, statutory reserves, other free reserves, surplus arising from sale of assets, investment fluctuation reserves, innovative perpetual debt instruments, and perpetual non cumulative preference shares.

The progression of the capital over the scenarios, as projected by the firms, reveals a combination of credit losses, the PPNR to absorb the losses, and the generation of the required level of ALLL.   Even though the projections of the firms for these items were divergent from the supervisors’, still they served a useful purpose as a sort of benchmark.   In the course of the SCAP exercise, supervisors had time and again made suitable adjustments to the data submitted by the firms, in order to bring it in line with the provisions of the SCAP, as also to ensure ethical accounting standards.

On account of the above divergence, supervisors preferred to project a pro forma capital for 2010 for each of the firms, by applying revised estimates of credit losses and revenues.   A pro forma financial statement is one that is adjusted to reflect a projected transaction, a part of “what-if” analysis.   The base figures related to the 2008 Q4 levels of equity and capital and regulatory capital from Y-9C reports.   The Y-9C is a consolidated financial statement of Bank holding companies.  

Supervisors estimated the pro forma equity capital by rolling tax adjusted net income for the two year horizon through equity capital.   Supervisors followed the post purchase accounting basis to calculate estimated losses.   The losses and provisions are considered to arise instantly, whereas, the revenues to offset these losses are taken to accrue over a period of time.   This conservative accounting system ensures that the firms are well prepared to face up to the prospect of losses.

The reserve increases that were projected for the assessment horizon meant, that a provision for future losses was required.   That, in turn, would reduce the resources to absorb legacy losses, and increase capital needs.   In addition, the supervisors calculated the impact of payments of preferred dividends and accounted for the impact of regulatory capital rules, like limits on inclusion of deferred tax assets in Tier I capital.

                                                                                                To be concluded.

Acknowledgement:  Adapted from the official document of the Board of Governors of the Federal Reserve System.

The Supervisory Capital Assessment Program-Part XIX

This is the nineteenth in a series of articles on the SCAP.

Accounting Adjustments:  One of the major tasks for the supervisory teams, engaged in the review and assessments of the submissions of the 19 BHCs, was to ensure that the projections and the forecasts made by the firms conformed to the applicable accounting standards, and in keeping with the letter and spirit of the SCAP methodology.

Not only the supervisors had to take into account the existing accounting standards, but also any changes effected therein, and new ones introduced in the course of the SCAP exercise.   For example, the FASB guidance for what is fair value measurement and impairment was issued on April 9, 2009 necessitating resubmissions by the firms, and reassessment by the supervisors.

In the same way, the supervisors had to evaluate the potential impact of the proposed changes to the FAS 140, expected to be implemented in January 2010.   The FAS 140 lays down accounting and reporting standards in respect of transfers and servicing of financial assets, and the cancellation of liabilities.   The implementation of the FAS 140 is expected to have far reaching implications for the firms, as it could result in assets in the value of USD 900.00 billion being brought onto the balance sheets of the firms.   Correspondingly, the risk weighted assets were increased by about USD 700.00 billion, to reflect this projected consolidation.  

The creation of these new assets was also factored into the fresh and enhanced requirement of ALLL.   These were then treated as new loans.   This was one of the major accounting adjustments made.

The second set of major accounting adjustments related to the impact of the discounts on purchased impaired loan portfolios acquired during mergers in conformity with SOP 03-03.   The SOP 03-03 is an accounting standard for certain loans and debt securities, acquired in a transfer.   These loans (impaired assets) were acquired at a good discount during mergers, the amount of which is pegged at around USD 90.00 billion.   It is these discounts that make up the major part, if not entirely, of the projected losses on impaired acquired loans in the two scenarios.   Hence it was imperative to consider these discounts in assessing possible future losses to be incurred by these firms.

Supervisors made another adjustment, in respect of the value of the impaired acquired loans by showing them at their original values, and not the discounted values they were acquired at.   In other words, the principal amount and the discount were clubbed together, to bring the loan amount at par with the principal amount. as on the date of acquisition.Thereafter, these losses(projected future losses), were netted against the discount taken by the firms when they acquired these loans.

The above accounting adjustments were considered necessary to invest the SCAP process with the required level of accounting integrity, and ethical standards, expected of such an exercise.

                                                                                                   To be concluded.

Acknowledgement:  Adapted from the official document of the Board of Governors of the Federal Reserve System.

The Supervisory Capital Assistance Progam-Part XVII

This is the seventeenth in a series of articles on the SCAP.

Category-wise review and assessment(contd):

Trading portfolio losses:  Among the 19 BHCs participating in the SCAP exercise, there are 5, that have exposures exceeding USD 100.00 billion in trading assets.   Supervisors evaluated their trading loss estimates, relative to the actual market movements, that took place during the period of the stress horizon, i.e., June 30 to Dec. 31, 2008.   This was the base for the supervisors to study the issue of projected trading losses of the firms.

For this purpose, they used information on trading book positions from the firms’ internal risk management reports.   Accordingly, they prepared their version of the projected trading losses, and made a comparative study of the firms’ submissions.   This way they identified areas with significant divergence between the firms’ submissions and their own.  Such areas of divergence came in for more detailed scrutiny and investigation, to satisfy themselves of the authenticity of the figures , as well as the correctness of their approach.  

Supervisors reviewed once again, the firms’ submissions like the shocks to prices and spreads, the methodology used by the firm to value the assets, etc.   In addition, they checked for the inclusion of material exposures and assets in the stress tests.   After carrying out this exhaustive procedure, the final estimates were arrived at, after making suitable adjustments in regard to divergent figures.   Further, the SCAP included an incremental default risk estimate for the firms’ trading book positions.

Counter-party credit risk:  Supervisors, when reviewing the estimated loss on account of counter-party credit risk, paid more attention to the reasonableness of counter-party credit risk losses, arising from growth in exposure to such parties, and credit valuation adjustments that were made related to the market shocks applied to the assets in the trading books.  

Of special interest to the supervisors was the firms’ loss estimates for the mark-to-market losses, arising from credit valuation adjustments consistent with trading shock scenario.   The credit valuation adjustment reveals the decline in the value of the counter-party’s obligations on account of the deterioration in his (counter-party’s) credit ratings.   This has a direct relationship with the firms’ earnings and the vlaue of its assets.  

During this process of assessment discussed above, supervisors took a view of the quality of the firms’ loss estimates in relation to the following:

1. Consistency in the application of the trading asset shock.
2. The comprehensiveness of the coverage of counter-parties and products.
3. The prudent treatment of legal netting, collateral and margin, and the soundness of the stress methodology employed.

The firms were also advised to calculate the IDR loss estimates for the counter-party credit losses from default.   The IDR stands for Issuer Default Ratings, which simply speaking reflects the ability of an entity to meet it’s financial commitments in time.   It was found that different firms employed different methodologies, and therefore the quality of submissions was also different.

                                                                                                        To be concluded.

Acknowledgement:  Adapted from the official document of the Board of Governors of the Federal Reserve System.

The Supervisory Capital Assistance Program-Part XVI

This is the sixteenth in a series of articles on the SCAP.

Category-wise review and assessment(contd):

Other Loans:  These include farmland lending, loans to Governments, and others.   Hence it is a very varied portfolio of loans, and it is very difficult to apply a fixed range of parameters across them.   Hence the supervisors relied on the firms’ loss records for the past five years to analyze and evaluate the firms’ submissions.

Securities in AFS and HTM portfolios:   The major portion of securites in the Available-for-sale, and the Held-to-maturity portfolios are relatively safe, being Treasury securities, Government agency securities, sovereign debt, and high grade municipal securities.

The private securites portfolio includes corporate bonds, equities, asset-backed securities, commercial mortgage-backed securities, and non-agency residential mortgage backed securities.   The focus and emphasis of the supervisors was on analyzing and evaluating private sector securites portfolio for possible reduction in its value, on account of adverse economic conditions.  

As such they made a detailed examination of all the relevant  securities like collateral type, vintage, metropolitan area, and property type.  This was followed by a check of all the inherent strengths of each security like credit ratings, current credit support, and carrying and market values.   Each security was examined for the possibility of its impairment during its lifetime.

Supervisors examined over 100,000 securities as per CUSIP to determine loss estimates for the securities.   The CUSIP is the Committee on Uniform Security Identification Procedures, that allots the unique identification number to every stock and bond in the U.S. and Canada.      For each of the securitized assets, the credit loss rates for the underlying collateral were weighed against current credit support levels for the securities.   These loss rates were consistent with those of the unsecuritized accrual loan portfolios.   If it was found that the current level of support was not sufficient to cover the projected losses, then the value of the security was reduced proportionately, with “other than temporary impariment”(OTTI) charge, as per accounting guidelines.  

Coming to the corporate and municipal bonds, they were evaluated for their “other than temporary impairment” potential, based on the indicators such as the likelihood of its downgrade, including information from market credit spreads.   Supervisors determined OTTI for each equity security, in a situation when the stressed market value was below the carrying value.  

Based on the portfolio characteristics and ratings, the supervisors evaluated the position marks to pinpoint any anomalies, conservative or aggressive practices, and methodological outliers among the firms.   Outlier is an observation that lies outside the overall pattern of a distribution, and indicative of a problem.

Supervisors paid particular attention to the institutions with higher levels of accumulated and other comprehensive income(AOCI), relative to tangible common equity.   The AOCI is a measure of unrealized gains and losses on AFS securities based on current and market values.

The FASB or the Financial Accounting Services Board, came out with new guidelines for fair value measurements and impairments in the course of the SCAP exercise.   Firms had to resubmit data and information for the baseline scenario.   However, for the more adverse scenario, this was not done.

                                                                                                           To be concluded.

Acknowledgement: Adapted from the official document of the Board of Governors of the Federal Reserve System.

The Supervisory Capital Assistance Program-Part XV

This is the fifteenth in a series of articles on the SCAP.

Category-wise review and assessment(contd):

Commercial and Industrial Loans:  These are loans that are extended to corporations and organisations and not directly to the consumer.   They may be working capital or Term Loans.  

The loan loss projections made by the BHCs were analyzed by the supervisors by using two standards.   One was based on the industry-wise exposures like chemicals, foodstuffs, etc, and the other, on the system of internal rating followed by the firms.   The supervisors ensured that the system followed by the firms was in conformity with their own, to get the desired result, namely, the true extent of the firms’ exposure, and the corresponding loss projections.  

 Where the firm had not taken steps to establish the default probabilities for any exposure, the supervisors completed the job.   Supervisors confirmed their own exercise with the help of similar information from third party vendors.

The Monte Carlo simulation was employed to evaluate loss estimates of the firms.   The Monte Carlo method is the use of random numbers and probability to solve problems.   This multi-pronged approach of the supervisors resulted in obtaining loss estimate figures that were consistent, in so far as firm-specific exposure was concerned, as well as the standard assumptions made for arriving at loss projections.   At the end of this exercise, the results were compared with the submissions made by the firms.   Wherever necessary, suitable adjustments were made to ensure consistency across all the 19 firms.

Commercial Real Estate Loans:  CRE loans include those extended for construction of projects like shopping malls, office complexes, residential complexes, etc.   In order to analyze and evaluate the loan loss projections of the firms, they were asked to sumbit detailed information on the following parameters:

1. Property type, whether agricultural, residential, commercial, etc.
2. Loan to value ratio: It is a ratio applied to mortgages.   Higher the ratio, the more risky the loan, and consequently, higher the rate of interest charged.
3. Debt service coverage ratio: It denotes the ability of the borrower to service his term loan obligations.
4. Geography
5. Loan maturities.

Different loans were evaluated seperately.   For instance, those for construction and land development,  non-farm, non-residential projects, etc were analyzed and evaluated seperately.   Each portfolio, being different from others, but having certain common qualities, the supervisors adopted a consitent procedure for their evaluation.   They utilized certain common industry vendor models, apart from developing proprietary ones to obtain independent loss estimates.

The loan portfolios were divided into two categories.   Those maturing in 2009 and 2010, and those maturing after 2010.   In the first case, they compared current LTV ratios with benchmark LTVs to determine the ability of the borrowers’ ability to get refinance.   In the latter case, the supervisors used the vendor models including factors like property type, LTV, DSCR, etc.   In case of construction loans, special attention was paid to the geographic nature of the project.

                                                                                                       To be concluded.

Acknowledgement:  Adapted from the official document of the Board of Governors of the Federal Reserve System.

The Supervisory Capital Assistance Program-Part XIV

This is the fourteenth in a series of articles on the SCAP.

Category-wise review and assessment:  The SCAP supervisors applied a range of models and tools in carrying out the review and assessment of the submissions of the 19 BHCs.   We shall study, in detail, the category-wise review and assessment done in regard to the following:  first and second lien mortgages, credit cards and other consumer loans, commercial and industrial loans, commercial real estate loans, other loans, securities in available for sale and held to maturity portfolios, trading portfolio losses,  counterparty credit risk, pre-provision net revenue, and allowance for loan and lease losses.

First and Second Lien Mortgages:  Residential mortgages were an area where many of the BHCs took a big hit on their bottomlines.   The firms submitted information relating to this portfolio, the methods adopted to project losses, the important underlying assumptions in the methods adopted, etc.   Apart from this, at the instance of the supervisors, the firms also provided the following information about their residential mortgages:

1. Type of product
2. Loan to Value Ratio
3. FICO score
4. Geography
5. Level of documentation
6. Year of origination
7. Other relevant features

The agencies evaluated the first mortgages, home equity lines of credit, and closed end second mortgage products seperately.   They evaluated submissions of each firm in regard to the model, assumptions, and circumstances independently, as well as in relation to the peers in the group, to make any adjustments, if necessary.   The firms’ assumptions regarding prepayment of existing loans, and availability of new limits was normalized to make generally consistent across firms.   Each firm’s portfolios were analyzed by taking into account the unique features of the portfolio, and application of common loss estimation methodologies in the backdrop of industry-wide data.   Where any particular characterisitc of the loan portfolio like FICO, LTV bands, etc., provided any indication of defaults, they were applied more intensively to evaluate the submissions and make necessary adjustments to them.

Credit Cards and other Consumer Loans:  In case of credit cards, the methods used by the firms to project losses were in relation to the two macroeconomic scenarios.   Each of the firm’s results were benchmarked against historical trends in such portfolios comprising of loss, paydown/runoff, roll rates, utilization, etc.   Fhe firms submitted information called for about credit cards on the FICO scores, payment rates, utilization rates, geographic concentration, etc.

The supervisors, in addition to using existing models to evaluate the firms’ credit card loan loss projections and resources, also developed risk profiles suited to specific portfolios, that enabled them to make cross-firm comparisons.   That, in turn, revealed whether the firms had furnished reasonably accurate submissions.  It was found that, generally, the results obtained by the supervisors were relatively close to those of the BHCs.

Coming to the other loans, the bulk of which were auto loans, personal loans, and student loans, the firms submitted information on FICO scores, LTV, Term, vehicle age, and geographic concentratin.   The above data was examined in detail, alongwith the embedded components of each firm’s portfolios.   Further, historical loss experience, and performance measures were examined to arrive at the acceptable level of projected losses.

                                                                                                     To be concluded. 

Acknowledgement:  Adapted from the official document of the Board of Governors of the Federal Reserve System.

The Supervisory Capital Assistance Program-Part XIII

This is the thirteenth in a series of articles on the SCAP.

Review and Assessment(contd):  As we have seen earlier, how the supervisory agencies had developed special models, apart from using the existing ones in arriving at the loan loss rate ranges.   These ranges were supplied to all the 19 BHCs for submission of their projected loan losses and corresponding resources for absorbing the losses.   These ranges were fine tuned to provide for inherent differences in the portfolios of different firms and the different results likely to be obtained from them.

However, one of the factors that the agencies had to contend with, was the different business models followed by the BHCs.   As such there would be differences in the performances of the firms, their prospects and problems, etc.   In order to address the issue, the agencies developed more detailed benchmarks.  

These benchmarks for losses and resources incorporated firm-specific factors relating to their various loans, past performace, the composition of the portfolio, origination vintage (when the mortgage lender created the mortgage by securing it against the mortgager’s real property), borrower characteristics like their cash flows, financial needs, etc., geographic distribution, like exposures within national boundaries and outside their own countries, and the business mix, for example in a Bank, the business mix would relate to the deposit products vis a vis the loan products.  

This exercise helped the supervisors in two respects.   One, it gave them a common backdrop against which they could interact with the firms about their analysis on the projections made by them, and second, it provided them(supervisors) additional data to determine where these results should be adjusted.

These benchmarks developed by the supervisors were, in fact, based on existing models and approaches they were using in their routine work in monitoring risk and firm conditions.   This was part of their regular job, even before initiating the SCAP exercise.  Apart from utilizing such existing data, the agencies also called for specific additional information wherever required, in order to get a clear picture.   The supervisors were able to elicit vital information by following this procedure of applying consistent methodologies, across firms, as well as using firm-specific information about the BHCs.

Summary of the Review and Assessment process:  The purpose and intent behind the exercise was to gather the maximum information relevant to the exercise, to evaluate the information thus obtained for consistency, relevance and application, in arriving at the nearest level of loan losses likely to be suffered by the firms under weak economic conditions, and the availability of resources to the firms, to enable them to absorb the losses.

The supervisors also made suitable adjustments to the projections submitted by the firms, to bring consistence to them across institutions, and in line with the macroeconomic scenarios used as a backdrop to the exercise.

Overall, it was a comprehensive job that is expected to yield a fair result for the efforts made by the concerned in this direction.

                                                                                              To be concluded.

Acknowledgement:  Adapted from the official document of the Board of Governors of the Federal Reserve System.

The Supervisory Capital Assistance Program-Part XII

This is the twelfth in a series of articles on the SCAP.

Review and Assessment(contd):  The process of reviewing and assessing the submissions of the BHCs was exhaustive, with several teams of specialists and experts in various areas like economics, financial analysis, etc., going through the data and supporting information with a fine tooth comb.   It was no doubt an enormous job.  

The fact that the firms were asked to submit exhaustive data to support their projections, ensured that the supervisors had a mountain of facts and figures to sift through, and to pick and choose the most appropriate information for the task on hand.

The supervisors adopted a two-pronged strategy to review and assess the submissions of the firms.   One was the direct review of assumptions of the losses and the resources to counter the losses, followed by the review of the models used by the firms in making such assumptions and projections.   Second, the supervisors developed certain independent benchmarks against which they evaluated the submissions.

The purpose of developing these independent benchmarks, would appear to be the fact that, they did not want to rely entirely on the models and tools employed by the firms.   The concerned agencies wanted to have their own models against which they would review the firms submissions.   This would also help in the process of cross verification of the underlying facts and figures.

One of the benchmarks developed by the supervisors was the indicative loan loss rate ranges, that the firms were given before they carried out the exercise of projecting potential losses in their accrual loan portfolios under the two macroeconomic scenarios, namely, the baseline, and the more adverse one.  

The ranges for the loan loss rates that were adopted for the SCAP exercise were calculated by different agencies associated with the program, like the FDIC, etc.   The methodologies adopted by these agencies, in coming up with this model, were drawn from their regular work, and some new innovations made by them especially in regard to this program.   However, all the ranges adopted for this purpose are essentially estimates, having regard to the uncertainty about the loss likely to be incurred by the large BHCs under worrisome economic conditions.

One of the challenges faced by the supervisory agencies, was to come up with indicative loss rate ranges applicable to different types of loans.   For example, in the case of residential mortgages, the model adopted included micro models of default,  loss-given-default, based on information about individual loans, models based on the performace of the regional mortgage loan portfolios, and analysis of mortgages held by failing Banks.  

In case of consumer loans and other commercial lending like commercial real estate lending, the techniques applied for the analysis was appropriate to the type of portfolio.   Among the techniques employed for the purpose was regression of historical charge-off or default data against macroeconomic variables like home price appreciation, the unemployment rate, and the analysis of loan-level data available with the supervisors.

In short, a multiplicity of models and micro models were used in arriving at the estimated loss and resources available against the same.

                                                                                                         To be concluded. 

Acknowledgement:  Adapted from the official document of the Board of Governors of the Federal Reserve System.

 

The Supervisory Capital Assistance Program-Part XI

This is the eleventh in a series of articles on the SCAP.

In the last few articles, we had examined the program design of the SCAP, and details of the exercise carried out to ascertain the capital requirements of the BHCs, through the process of submissions of data and information by the firms.

Review and Assessments:  After the participating BHCs had submitted their estimates of losses and resources, it was the turn of the SCAP supervisors to start their job of reviewing these submissions and assessing them for their accuracy, relevance, and timely decision making.

Examiners, Economists, and Financial Analysts numbering over 150 were roped in from all the concerned agencies to carry out the review and assessment.   These experts were divided into a number of teams, each of which went into one aspect of the losses and resources submissions of the 19 firms.   Each team brought with it, expertise in one particular area, like loss projections for consumer portfolios, commercial and industrial, and commercial real estate portfolios, available-for-sale, and held-to-maturity securities portfolios, trading account assets, counterparty credit risk, projections for PPNR, ALLL, etc.   Apart from this, teams were also organized to advise the SCAP on issues of Accounting, Regulatory Capital, Financial and Macroeconomic modelling.

The first thing that the supervisory teams reviewed was whether the methods adopted by the BHCs were in keeping with the guidance given by the SCAP.   Secondly, whether the firms had adhered to the letter and spirit of the guidance, in making their submissions.   And thirdly, whether the data and other information obtained was consistent with the guidelines provided to the firms.  

The submissions of the BHCs had to meet both quantitative and qualitative requirements of the SCAP, to enable the supervisors to do justice to their work.   The supervisory teams were required to analyze the firms projections from a cross-firm perspective, by using the information supplied by the firms in support of their submissions.   That would act as a test of the authenticity of the data and the underlying assumptions, as results emerging from analysis and evaluation of data from a cross-section of firms would be more dependable.

On-site examination of the firms was another important feature of the review and evaluation exercise.   This enabled the supervisors to be physically present at the firms premises, to study and absorb the actual environment prevailing there, and to satisfy themselves about the authenticity of the submissions.

Some of the most important factors that the supervisory teams had to constantly keep track of, and ensure compliance of  were:

1. To understand the particular parameters and assumptions employed by the firms.
2. The consistency of these in the backdrop of the macroeconomic scenarios.
3. The models and methodologies adopted to generate the loss and resource estimates.

By following up on the above methods and models, the supervisors hoped to keep their work on track, and arrive at the right conclusions about the losses and resources data submitted by the firms.

                                                                                                 To be concluded.

Acknowledgement:  Adapted from the official document of the Board of Governors of the Federal Reserve System.

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