Mortgage and small business loans are hard hit by stress tests

FOR IMMEDIATE RELEASE

CONTACT:
Sean Oblack
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Washington, D.C. – January 31, 2017 –  The Clearing House published a new research note The Capital Allocation Inherent in the Federal Reserve’s Capital Stress Test that attempts to determine which bank customers are being favored or disadvantaged by post-crisis regulatory rules – the Federal Reserve’s Comprehensive Capital Adequacy Review (CCAR) stress test.  Specifically, the research derives the capital requirements for each category of bank asset classes in CCAR. The results show that the Federal Reserve’s CCAR stress test is imposing dramatically higher capital requirements on certain asset classes – most notably, small business loans and residential mortgages – than Basel standardized models and banks’ internal models that are approved by the Federal Reserve.

“The results of our research suggest that the asset allocation power of CCAR has the ability to greatly impact the availability of credit to small businesses and other economic actors,” said Francisco Covas, deputy head of research at The Clearing House Association.  “Our analysis suggests that CCAR is having an adverse impact on credit provided by large banks for many asset classes.  For example, CCAR is likely making it harder for households to obtain a mortgage or small businesses to get a loan to help get off the ground or expand and grow.”

Using the post-stress capital ratios published by the Federal Reserve under CCAR and banks’ own Dodd-Frank Act Stress Tests (DFAST) projections, the research note estimates the capital requirements by asset type in U.S. stress tests.  Specifically, for each major loan portfolio and for trading assets, the research note estimates capital requirements that would best describe banks’ post-stress regulatory capital ratios combined with the stress tests’ capital hurdle rates under the severely adverse scenario, controlling for differences in equity distributions across banks.  Some of the research note’s key takeaways include:

• For mortgage loans, CCAR capital requirements are 45 percent higher than under banks’ own DFAST projections and 95 percent higher than under the Basel III standardized approach;
• For small business loans, CCAR capital requirements are 80 percent higher than under banks’ own DFAST projections and 220 percent higher than under the Basel III standardized approach; 
• For commercial and industrial loans, CCAR capital requirements are 25 percent higher than under banks’ own DFAST projections and 50 percent higher than under the Basel III standardized approach;
• For commercial real estate loans, CCAR capital requirements are 30 percent lower than under banks’ own DFAST projections and 70 percent lower than under the Basel III standardized approach;
• Lastly, for trading assets, CCAR capital requirements are 20 percent higher than under banks’ own DFAST projections and 340 percent higher than under the Basel III standardized approach.

About The Clearing House.  The Clearing House is a banking association and payments company that is owned by the largest commercial banks and dates back to 1853.  The Clearing House Payments Company L.L.C. owns and operates core payments system infrastructure in the United States and is currently working to modernize that infrastructure by building a new, ubiquitous, real-time payment system.  The Payments Company is the only private-sector ACH and wire operator in the United States, clearing and settling nearly $2 trillion in U.S. dollar payments each day, representing half of all commercial ACH and wire volume.  Its affiliate, The Clearing House Association L.L.C., is a nonpartisan organization that engages in research, analysis, advocacy and litigation focused on financial regulation that supports a safe, sound and competitive banking system.