Lecture 16 - Capital Management & Regulations

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EXAM - Possible questions include know functions of capital; order of loan losses effect on balance sheet; types of bank capital; general description of different regulatory measures of bank capital and new required levels; general risk relationships between different on-balance sheet and off-balance sheet items in computing level of risk-weighted assets; calculating risk-weighted assets.  You should also KNOW/understand the rationale behind stress tests and CCARs. 

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Stress tests are now a big part of capital regulation.  The FED runs stress tests on large banks with assumptions about very negative economic and financial conditions.  In addition the banks have to submit a Comprehensive Capital Analysis and Review (CCAR) explaining their capital plans, e.g., dividends, stock buybacks.  The FED must approve the bank's plan for it to continue with its plan.

A four-minute video by the European Banking Association (EBA) explains the stress tests released on Oct. 26, 2014.   https://www.youtube.com/watch?v=bCBnr6Z3DXQ&feature=player_embedded.  The rationale for the stress tests is similar to the stress tests in the U.S.

The U.S. updates in March 2015 are below. 

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Print and bring to class page 14A (this is equivalent to p. 19 on pdf version) of the assigned SunTrust Banks, Inc. Performance Report at link belowYou should also bring the information for your class project BHC because you will have to evaluate similar information and the discussion should be useful to you.

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OPTIONAL MATERIALS NOT ON EXAM BELOW:

To see the public portions of  recent resolution plans (living wills) see http://fdic.gov/regulations/reform/resplans/index.html.
For a good discussion on Capital Planning at Large Bank Holding Companies (August 2013)  that also includes loan loss estimation methodologies click on http://www.federalreserve.gov/bankinforeg/bcreg20130819a1.pdf

The following link provides a speech on Nov. 9, 2011, discussing the evolution of capital regulation and developments.  Most of the developments are covered in the class notes and the speech is only for those who want more information on the topic.  An article on examples of VAR reporting follows.

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