Atlas Capital Bank, a major financial institution with assets over $60 billion, is preparing for its annual Comprehensive Capital Analysis and Reviews (CCAR). As part of its preparations, the bank's risk management department has been tasked with integrating scenario analysis into the bank's stress testing and capital planning programs. This integration is aimed at ensuring the bank can withstand severe economic downturns and satisfy regulatory requirements. The bank's Chief Risk Officer (CRO), Jennifer, has stressed the importance of employing diverse and realistic scenarios in the stress testing program. She believes that this would provide a more comprehensive view of the bank's potential vulnerabilities. Which of the following statements made by Jennifer during a planning meeting is most likely correct?
A
CCAR requires static forecasting of balance sheets and income statements.
B
Stress tests only need to be performed on the most profitable business lines.
C
The severely adverse scenario in the bank's stress tests should assume a global recession.
D
If stress tests reveal the bank might fail to meet minimum capital standards, there's a need to increase the risk appetite.
Explanation:
According to the information provided by the Federal Reserve, the "severely adverse" scenario for stress testing should assume a global recession. This would test the bank's resilience under extreme stress. Hence, Jennifer's statement about assuming a global recession in the adverse scenario aligns with the guidelines for severe stress testing.
A is incorrect: CCAR actually requires dynamic forecasting of balance sheets and income statements, which means the bank must forecast revenues, loan loss provisions, rules for making new loans, and regulatory ratios as they evolve over time.
B is incorrect: Stress tests should be performed across all business lines, not just the most profitable ones. This is because stress testing aims to assess the potential impact of adverse scenarios on the entire bank's financial health, not just the segments that currently bring in the most revenue.
D is incorrect: If stress tests indicate that a bank fails to meet minimum capital standards, it would actually need to lower its risk appetite, not increase it. This is because a failure to meet capital standards indicates insufficient resilience, necessitating reduced exposure to risk.
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