The Supervisory Capital Assistance Program-Part VIII

Losses and their absorption:  Under the SCAP, the nineteen BHCs were asked to submit their projections of expected losses, and the resources to absorb these losses, for the two year period of 2009 and 2010.   The BHCs were also expected to have the financial capacity to absorb the losses likely to be incurred in 2011.   The details of these projections are discussed below.

Loss Projections:  The nineteen BHCs that were required to participate in the SCAP exercise, were asked to submit estimated losses on loans, securities, and trading related exposures.   That apart, potential losses from off Balance Sheet exposures were also to be projected.   These projections pertained to the period of 2009 and 2010.  And these projections were to be submitted for the two scenarios, the baseline and the more adverse one.

The BHCs were asked to report projected losses on loans under twelve seperate categories namely Prime, Alternative A-paper, and Subprime mortgages under the First Lien Mortgages, Closed end junior liens and HELOCs or Home Equity Line of Credit under the Junior lien mortgages, Commercial and Industrial loans, Commercial Real Estate loans, Construction, Multi Family, and Non farm, non residential loans, Credit Cards, Other consumer loans, and Other loans.

The firms were also asked to submit projections for loans and securities held in the available-for-sale, and held-to-maturity portfolios, and in case of firms with trading assets exceeding USD 100.00 billion, for positions held in the trading account.

In addition, the firms were also asked to make necessary changes in their Balance Sheets for the value of the assets in conformity with a situation where their borrowers would utilize unused credit limits, and other assets/exposures being taken back on the Balance Sheet on account of stressful economic conditions, as also on account of pending accounting changes.

The above selection of the categories of loans corresponds to the regulatory requirements in regard to periodic filings to be made by the BHCs.   That is, in the normal course, the BHCs would be submitting several statements, returns, or filings under regulatory provisions.   So also, under the SCAP, the same kind of submissions were required to be filed.  

However, the difference between the regular filings and those required at this point of time is the emphasis placed on the qualiy of data and other information relating to the sub-categories of the loans.   The idea behind this is to know the exact composition of the various parts forming the bigger picture.

The supervisors wanted to be sure that there were no internal contradictions and conflicting positions within each portfolio, and that the overall picture was composed of compatible positions.   As a matter of fact, the firms were required to submit relevant data not relating to the above twelve categories also, just to make sure that no data or information of material importance was missed out.

The concern of the supervisors was to ensure that the projections made by the BHCs for losses and their capacity to absorb the losses, was based on realistic and consistent assumptions, which would enable them to come to the proper conclusions about the capital required by each of the BHCs.

                                                                                                         To be concluded. 

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