FINANCIAL INSTITUTIONSSECTOR IN-DEPTH 9 May 2016ContactsGlenn Levine 212-553-9595Assc Dir-Sr Research Analyst glenn.levine@moodys.comABOUT CAPITAL MARKETS RESEARCHAnalyses from Moodys Capital Markets Research, Inc. (CMR) focus on explaining signals from the credit and equity markets. The publications address whether market signals, in the opinion of the groups analysts, accurately reflect the risks and investment opportunities associated with issuers and sectors. CMR research thus complements the fundamentally-oriented research offered by Moodys Investors Service (MIS), the rating agency.CMR is part of Moodys Analytics, which is one of the two operating businesses of Moodys Corporation. Moodys Analytics (including CMR) is legally and organizationally separated from Moodys Investors Service and operates on an arms length basis from the ratings business. CMR does not provide investment advisory services or products.View the CMR FAQ Contact the CMR team Follow us on TwitterMoodys Analytics markets and distributes all Moodys Capital Markets Research, Inc. materials. Moodys Capital Markets Research,Inc. is a subsidiary of Moodys Corporation. Moodys Analytics does not provide investment advisory services or products.For further detail, please see the last page.VIEWPOINTSEstimating US Credit Risk Under the Fed's CCAR 2016 Severely Adverse Scenario Highlights¯ Since 2012, the results of Moodys Analytics' annual CCAR simulation have been indicative of the Fed's expected loss estimates for banks' C&I loan portfolios.¯ This is the first year that we have run this simulation using the updated Stressed EDF9 methodology.¯ Moodys Analytics estimates the aggregate expected loss rate for C&I loans given the CCAR 2016 severely adverse scenario ranging from 5.8% to 6.5%.Aggregate Expected Loss Rate Under the CCAR 2013 to 2016 Severely Adverse Scenarios, %Source: Federal Reserve Board; Moodys Analytics calculationsMOODY'S ANALYTICS FINANCIAL INSTITUTIONS2 9 May 2016 VIEWPOINTS: Estimating US Credit Risk Under the Fed's CCAR 2016 Severely Adverse ScenarioIntroduction Each year since the Federal Reserve (Fed) commenced its annual stress tests of the capital reserves of large bank holding companies (BHCs) in the US CCAR (Comprehensive Capital Analysis and Review) the Capital Markets Research Group of Moodys Analytics has attempted to anticipate the Feds results. A key element of these stress tests is the projection of portfolio losses under adverse economic scenarios. For traditional loan portfolios, expected losses (EL) are computed from conditional estimates for probability of default (PD), loss given default (LGD), and exposure at default (EAD). Moodys Analytics Stressed EDF' (Expected Default Frequency) measures, which are public firm-level PDs conditioned on hypothetical economic scenarios, are constructed in a similar fashion to the PDs used by the Fed for projecting loss rates on commercial and industrial (C...
