In addition,  according to regulators, the process resulted in a methodology that yielded  credible results and by design helped to assure that the BHCs would be  sufficiently capitalized to weather a more adverse economic downturn. SCAP Process Included Coordination and Communication among the Federal Bank Regulators and with the BHCs

Robust coordination and communication are essential to programs like  SCAP when bringing together regulatory staff from multiple agencies and  disciplines to effectively analyze complex financial institutions and  understand the interactions among multiple layers of risk. They also thought that the SCAP  process could serve as a model for future supervisory efforts. Such officials also stated that  publicly releasing the methodology and results of the stress test helped  strengthen market confidence. Not all SCAP participants agreed that the SCAP process was fully  transparent. Some BHC officials believed that this requirement  resulted in the BHCs having to raise additional capital because the  required ALLL increases were subtracted from the revenue estimates in  calculating the resources available to absorb losses. While SCAP Increased Capital Levels and Improved Confidence in the Banking System, BHCs Could Face Ongoing Challenges

SCAP largely met its goals of increasing the level and quality of capital  held by the 19 largest BHCs and, more broadly, of strengthening market  confidence in the banking system. Nine of the 10 BHCs were able to raise  the required SCAP amount of new common equity in the private markets  by the November 9, 2009, deadline (see table 2). Capital adequacy generally improved across all 19 SCAP BHCs during  2009. Some officials from participating BHCs and credit rating  agencies also viewed the BHCs’ ability to raise the capital required by the  stress test as further evidence of SCAP’s success in increasing market  confidence and reducing uncertainty. The 19 Tested BHCs Experienced Better Performance Than a Pro Rata Estimate under the More Adverse Scenario

As of the end of 2009, while the SCAP BHCs generally had not experienced  the level of losses that were estimated on a pro rata basis under the stress  test’s more adverse economic scenario, concerns remain that some banks  could absorb potentially significant losses in certain asset categories that  would erode capital levels. Specifically, GMAC exceeded the  SCAP 2-year estimated losses in the first-lien, second/junior lien, and  commercial real estate portfolios and the 1-year pro rata losses in the  “Other” portfolio; Citigroup exceeded the 1-year pro rata estimated losses  in the commercial and industrial loan portfolio; and SunTrust exceeded  the 1-year estimated losses in the first-lien and credit card portfolios. In addition, the Federal Reserve is finalizing guidance for examiners to  assess the capital adequacy process, including stress testing, for BHCs. Recommendations

To gain a better understanding of SCAP and inform the use of similar  stress tests in the future, we recommend that the Chairman of the Federal  Reserve direct the Division of Banking Supervision and Regulation to:    Compare the performance of the 19 largest BHCs against the more adverse  scenario projections following the completion of the 2-year period covered  in the SCAP stress test ending December 31, 2010, and disclose the results  of the analysis to the public. To leverage the lessons learned from SCAP to the benefit of other  regulated bank and thrift institutions, we recommend that the Chairman of  the Federal Reserve in consultation with the heads of the FDIC and OCC  take the following actions:    Follow through on the Federal Reserve’s commitment to improve the  transparency of bank supervision by developing a plan that reconciles the  divergent views on transparency and allows for increased transparency in  the regular supervisory process. Appendix I: Objectives, Scope, and Methodology

The objectives of this report were to (1) describe the process used to  design and conduct the stress test and participants views’ of the process,  (2) describe the extent to which the stress test achieved its goals and  compare its estimates with the bank holding companies’ (BHC) actual  results, and (3) identify the lessons regulators and BHCs learned from the  Supervisory Capital Assessment Program (SCAP) and examine how each  are using those lessons to enhance their risk identification and assessment  practices. Our primary source for the actual results at the BHCs  was the Federal Reserve’s Y-9C.
Why GAO Did This Study

The Supervisory Capital Assessment Program (SCAP) was established under the Capital Assistance Program (CAP)--a component of the Troubled Asset Relief Program (TARP)--to assess whether the 19 largest U.S. bank holding companies (BHC) had enough capital to withstand a severe economic downturn. Led by the Board of Governors of the Federal Reserve System (Federal Reserve), federal bank regulators conducted a stress test to determine if these banks needed to raise additional capital, either privately or through CAP. This report (1) describes the SCAP process and participants' views of the process, (2) assesses SCAP's goals and results and BHCs' performance, and (3) identifies how regulators and the BHCs are applying lessons learned from SCAP. To do this work, GAO reviewed SCAP documents, analyzed financial data, and interviewed regulatory, industry, and BHC officials.

What GAO Found

The SCAP process appeared to have been mostly successful in promoting coordination, transparency, and capital adequacy. The process utilized an organizational structure that facilitated coordination and communication among regulatory staff from multiple disciplines and organizations and with the BHCs. Because SCAP was designed to help restore confidence in the banking industry, regulators took unusual steps to increase transparency by releasing details of their methodology and sensitive BHC-specific results. However, several participants criticized aspects of the SCAP process. For example, some supervisory and bank industry officials stated that the Federal Reserve was not transparent about the linkages between some of the test's assumptions and results. But most of the participants in SCAP agreed that despite these views, coordination and communication were effective and could serve as a model for future supervisory efforts. According to regulators, the process resulted in a methodology that yielded credible results. By design, the process helped to ensure that BHCs would be capitalized for a potentially more severe downturn in economic conditions from 2009 through 2010. SCAP largely met its goals of increasing the level and quality of capital held by the 19 largest U.S. BHCs and, more broadly, strengthening market confidence in the banking system. The stress test identified 9 BHCs that met the capital requirements under the more adverse scenario and 10 that needed to raise additional capital. Nine of the 10 BHCs were able to raise capital in the private market, with the exception of GMAC LLC, which received additional capital from the U.S. Department of the Treasury (Treasury). The resulting capital adequacy of the 19 BHCs has generally exceeded SCAP's requirements, and two-thirds of the BHCs have either fully repaid or begun to repay their TARP investments. Officials from the BHCs, credit rating agencies, and federal banking agencies indicated that the Federal Reserve's public release of the stress test methodology and results in the spring of 2009 helped strengthen market confidence. During the first year of SCAP (2009), overall actual losses for these 19 BHCs have generally been below GAO's 1-year pro rata loss estimates under the more adverse economic scenario. Collectively, the BHCs experienced gains in their securities and trading and counterparty portfolios. However, some BHCs exceeded the GAO 1-year pro rata estimated 2009 losses in certain areas, such as consumer and commercial lending. Most notably, in 2009, GMAC LLC exceeded the loss estimates in multiple categories for the full 2-year SCAP period. More losses in the residential and commercial real estate markets and further deterioration in economic conditions could challenge the BHCs, even though they have been deemed to have adequate capital levels under SCAP. This report recommends that the Federal Reserve complete a final 2-year SCAP analysis, and apply lessons learned from SCAP to improve transparency of bank supervision, examiner guidance, risk identification and assessment, and regulatory coordination. The Federal Reserve agreed with our five recommendations and noted current actions that it has underway to address them. Treasury agreed with the report's findings.