Supervisory Stress Tests: CCAR and DFAST
CCAR and DFAST are annual exams where regulators impose a common recession scenario on every large US bank and check whether its capital would survive.
Prerequisites: Regulatory Capital Tiers, Risk-Weighted Assets
After 2008, US regulators stopped asking banks to self-report whether they were healthy and started running their own annual exam instead. Every large bank is handed the same hypothetical recession — the same path for unemployment, GDP, house prices, and market shocks — and has to show, using its own models, that its capital would stay above regulatory minimums all the way through it. That exercise is the Comprehensive Capital Analysis and Review (CCAR), paired with the mandatory stress test DFAST.
CCAR forces every large bank to project its own losses under the same regulator-designed recession scenario, so results are comparable across banks — and a bank that fails can be blocked from raising its dividend or buying back stock, even if it's solvent today.
What actually gets tested
The Federal Reserve publishes scenarios — typically a baseline, an adverse case, and a severely adverse case — specifying paths for unemployment, interest rates, equity prices, and other variables over roughly nine quarters. Each bank plugs that scenario into its own credit-loss models, trading-book stress models, and revenue projections, then reports the resulting capital ratio path. Regulators check two things: does capital stay above the minimum throughout, and is the bank's own process for planning capital distributions (dividends, buybacks) sound. DFAST is the statutorily required stress test itself; CCAR is the broader review that also judges the bank's capital planning process and can restrict payouts to shareholders even for a bank that technically stays above the minimum.
Worked example
A bank starts the stress horizon with a CET1 ratio of 12%. Under the severely adverse scenario — unemployment rising to 10%, equity markets falling 40% — its own models project cumulative credit losses and trading losses that would bring CET1 down to 6.5% by the worst quarter, against a regulatory minimum of 4.5%. The bank passes, but with a thinner buffer than a peer bank whose more diversified loan book only falls to 8.5% under the same scenario — a difference that directly affects how much each bank is allowed to return to shareholders that year.
What this means in practice
CCAR results shape real capital decisions well before any actual recession: a bank with a thin projected buffer typically holds back on dividend increases and buybacks voluntarily, anticipating regulatory pushback, while a bank with a wide buffer has room to return more capital to shareholders. Because the scenario is identical across banks, CCAR results are also one of the few apples-to-apples comparisons of resilience across the largest US banks.
Passing CCAR under the regulator's scenario says nothing about how a bank would fare in a different kind of crisis — one driven by a shock the published scenario didn't anticipate. That gap is part of why supervisors also run Reverse Stress Testing, which starts from the failure outcome and works backward to find the scenario that causes it.
Further reading
- Federal Reserve, 'Comprehensive Capital Analysis and Review' methodology