The Supervisory Capital Assistance Program-Part IX

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

Loss Projections(contd):  The BHCs were required to make loan loss projections for the years 2009 and 2010, for the 12 categories of loans as discussed earlier.   In this regard, the firms were instructed to make their estimates on the basis of their defaults in payment obligations, or cash flow losses, and not on the basis of losses incurred in relation to mark to market values.  

The supervisors also provided the firms with a range of indicative 2 year cumulative loss rates for the prescribed 12 categories of loans, in both the scenarios-the baseline and the more adverse.   The firms were,  however, permitted to deviate from the laid down loan loss rate ranges, provided they could justify it with proper evidence and their own track record.   Where the estimates of the firms fell below the range minimum, the firms were obliged to back up their estimates with appropriate data.  

As far as the loan loss rate ranges are concerned, they were arrived at using a variety of statistical tools, quantitative models, and historical data from the firms in relation to individual loans as well as groups of loans to macroeconomic variables.   The importance given to the individual loans is on account of the fact, that certain categories of loans, like housing loans, had resulted in huge losses to the firms having exposure to them.

The above projections to be made by the firms were pegged to the loans and securities balances outstanding as on December 31st, 2008, and reported by the firms in their FR Y-9C reports.   Suitable adjustments were to be made for any significant mergers, acquisitions, or divestitures made by the firms.   Another item that the firms were to include in their loss projections, was against loans availed out of unused credit limits, and securitized assets that could be reverted to the Balance Sheet under adverse market conditions.

In case of securities held in the available-for-sale and held-to-maturity portfolios, the firms were asked to project possible slide in the values, relative to net unrealized losses, at end of 2008, as reported by them under the relevant filing.   That apart, the firms were obliged to consider possible losses from other potential troublesome areas.

BHCs with trading account assets in excess of USD 100.00 billion as of December 31st, 2008 were required to provide projections of trading related losses for the more adverse scenario.   This included losses from counter party credit risk exposures, and potential counter party defaults.   In addition, where the BHCs had made credit valuation adjustments against exposures to counter parties, who they considered potential candidates for default, provisions had to be made accordingly.

As a matter of fact, the 19 firms had conducted a stress test in February 2009, to project these losses and were required to submit details of the same as to the inputs that had gone into the tests.   It would appear from the above that, the supervisors were extra cautious, presumably, to ensure there were no slip ups from their side.