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PRMIA Exam 8008 Topic 1 Question 12 Discussion

Actual exam question for PRMIA's Risk Management Frameworks, Operational Risk, Credit Risk, Counterparty Risk, Market Risk, ALM, FTP ? 2015 Edition exam
Question #: 12
Topic #: 1
[All Risk Management Frameworks, Operational Risk, Credit Risk, Counterparty Risk, Market Risk, ALM, FTP ? 2015 Edition Questions]

Which of the following statements is true in relation to the Supervisory Capital Assessment Program (SCAP):

I,The SCAP is an annual exercise conducted by the Treasury Department to determine the health of key financial institutions in the US economy

II,The SCAP was essentially a stress test where the stress scenarios were specified by the regulators

III,Capital buffers calculated under the SCAP represented the amount of capital that the institutions covered by SCAP held in excess of Basel II requirements

IV. The SCAP focused on both total Tier 1 capital as well as Tier 1 common capital

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Suggested Answer: C

In the February of 2009, the Federal Reserve (which is the US central bank system) and other US banking regulators embarked on a simultaneous assessment of the capital held by the 19 largest US bank holding companies. This was an unprecedented exercise of a kind never undertaken before, and was known as the Supervisory Capital Assessment Program (SCAP). The purpose of the exercise was to determine the amount of additional capital (called the 'capital buffer') each of the institutions covered would need to ensure that it would have sufficient capital if the economy weakened more than was then expected. The idea was that these financial institutions would then raise additional capital equal to their respective capital buffers by the fourth quarter of 2009.

Statement I is false on two counts: firstl the SCAP was conducted by the US central bank and other regulators, and not the 'Treasury Department' (the Treasury Department in the US is the equivalent of the Ministry of Finance in may other countries). Second, the SCAP was a one time exercise, and not annual.

Statement II is correct. The regulators prescribed rates of losses on credit assets of different kinds and other macro-economic assumptions, and asked the banks to determine the extent of losses they would need to bear (in addition to calculating them independently too). Therefore the SCAP was a stress test where the scenario was prescribed by the regulators.

Statement III is false. Capital buffer under the SCAP referred to the additional capital the banks would need to have certain ratios of capital, and not 'excess' capital.

Statement IV is correct. The SCAP envisaged two capital targets: a Tier 1 capital ratio in excess of 6% at the end of 2010; and a Tier 1 common capital ratio in excess of 4%. Therefore both the total Tier 1 capital and Tier 1 common capital were targeted.

Therefore Choice 'c' is the correct answer.

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