position paper

Navigating the CCAR Process with Increased Insight

Among the sea of regulatory requirements facing US banks is the Comprehensive Capital
Analysis and Review (CCAR) conducted by the Federal Reserve. This annual evaluation of
bank holding companies with more than $50 billion in assets is designed to ensure that
large financial institutions are adequately capitalized.

»» Challenging Regulatory CCAR is part of a larger trend since 2008 that has seen a significant increase in the complexity and
Environment comprehensiveness of bank oversight. This trend shows no sign of abating and it means banks must
employ higher levels of rigor in their compliance solutions. This is particularly true when stress tests
are involved, as is the case with CCAR.

Regulators are not only interested in the results of stress tests. Regulators expect transparency in model
governance, development, testing and documentation. They also demand that models utilize trusted
methodologies and yield demonstrably reliable and realistic results for given economic scenarios.

Ultimately, CCAR stress tests help the Federal Reserve understand how each bank’s lending portfolios will
perform under a variety of economic scenarios and capital ratios. Banks whose test results fail to satisfy
Federal Reserve requirements face significant reputational risk—CCAR results are made public. Yet banks
that unnecessarily maintain more capital in reserve than necessary pay a heavy price by increasing their
institution’s cost of capital and withdrawing needed liquidity from the market.

»» Keys to CCAR Success To navigate CCAR successfully, banks must minimize the dissonance between the Federal Reserve’s
broad-based regulatory models based on pooled data and each bank’s own portfolio-specific models.

A smart way for each bank to address this challenge is to benchmark its modeling results to broad-
based analytic modeling results before the CCAR submission process begins, helping to ensure
the bank’s results will be in line with the industry’s anticipated results. Banks should not fly blind
Regulators expect and potentially deliver results to the Federal Reserve without looking at multiple perspectives and
transparency in model benchmarks. The Federal Reserve itself offered this advice in the guidance it issued in August 2013.
governance, development,
In measuring probability of default, banks should also speak a language that is universal. Probability
testing and documentation. of default in Florida should be measured using the same yardstick used in California, New York and
They also demand that South Dakota. While custom risk measurements often look at a bank’s own data, it is desirable to look
models utilize trusted at broader perspectives too. Regulators are more likely to understand risk measurements based on
widely understood industry standards.
methodologies and yield
demonstrably reliable and
realistic results for given
economic scenarios.

www.fico.com Make every decision countTM

Navigating the CCAR Process with Increased Insight

»» Be Smart, Be Prepared Much is known about the CCAR process. Banks have no excuses for being unprepared for CCAR stress tests.
Simple tools such as the FICO® Score Economic Calibration Service can help banks avoid costly mistakes.

The FICO Score Economic Calibration Service provides banks with results generated by models that
begin with a broad national perspective similar to the Federal Reserve’s data collection process. The
models then incorporate the Federal Reserve’s three economic scenarios: national level attributes,
Moody’s Analytics regional economic variables (based on 22 national attributes used by the Federal
Reserve) and the CoreLogic® Home Price Index.

The modeling results give banks a detailed understanding of projected default rates on car loans,
residential mortgages and credit cards at the state and metropolitan statistical area (MSA) levels under
the three economic scenarios used by the Fed for CCAR stress tests. The projections cover the Federal
Reserve’s requisite nine-quarter horizon.

The probabilities of default in the models are tied to FICO® Scores. As economic conditions
deteriorate, the probability of default at a given FICO Score increases.

Banks can then compare the probabilities of default as modeled using a broad-based perspective
from FICO to the bank’s own portfolio-specific modeling results to assess areas of alignment or
differences prior to their CCAR submissions. Because FICO® Scores are used by thousands of banks to
measure and communicate consumer credit risk, regulators are familiar with the FICO Score and it is
widely considered to be a trusted third-party tool for rank ordering credit risk.

»» Let FICO Help You CCAR is the Federal Reserve’s opportunity to test the efficacy of each bank’s capital planning
Manage Compliance procedures, and it serves a forcing function by requiring banks to document their portfolio risks and
reserve capital accordingly.

Given the critical importance of the capital planning process to safely extend credit through
economic cycles and the associated short time frame for the CCAR planning process, the prudent
path is to leverage tools that are designed specifically to help banks navigate the CCAR process.

The FICO Score Economic Calibration Service was launched to support CCAR processes by delivering
forward-looking FICO® Scores and PDs to provide additional keen industry insight and supports the
need to demonstrate operational safety and soundness by using widely accepted and understood
approaches to assessing consumer credit risk.

© 2014 Fair Isaac Corporation. All rights reserved. page 2

 Navigating the CCAR Process with Increased Insight

about FICO

FICO (NYSE: FICO) is a leading analytics software company, helping businesses in 80+ countries make
better decisions that drive higher levels of growth, profitability and customer satisfaction. The
company’s groundbreaking use of Big Data and mathematical algorithms to predict consumer
behavior has transformed entire industries. FICO provides analytics software and tools used across
multiple industries to manage risk, fight fraud, build more profitable customer relationships, optimize
operations and meet strict government regulations. Many of our products reach industry-wide
adoption—such as the FICO® Score, the standard measure of consumer credit risk in the United States.
FICO solutions leverage open-source standards and cloud computing to maximize flexibility, speed
deployment and reduce costs. The company also helps millions of people manage their personal
credit health. Learn more at www.fico.com.

For more information North America toll-free International email web

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FICO and “Make every decision count” are trademarks or registered trademarks of Fair Isaac Corporation in the United States and in other countries. Other product and company names herein may be trademarks of their
respective owners. © 2014 Fair Isaac Corporation. All rights reserved.

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