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FRM Exam Part II · Solvency, Liquidity and Other Regulation After the Global Financial Crisis

Stress Testing and Capital Planning: CCAR vs DFAST

Updated 11 October 2026 · Fact-checked

Supervisory stress testing projects a bank's losses, revenues and capital under severe but plausible scenarios set by regulators. DFAST is the stress test run under Dodd-Frank. CCAR adds a review of the bank's capital plan and its capital actions. To solve questions, project post-stress capital ratios, compare them with minimums, then judge whether dividends and buybacks are safe.

Understand Stress Testing and Capital Planning (CCAR, DFAST)

A stress test asks one question: if conditions turn bad, does the bank still hold enough capital to keep lending? Ordinary risk models such as VaR look at normal market moves. Stress tests look at rare, severe events, such as a deep recession with falling house prices and high unemployment.

In the US, two programmes matter for FRM. DFAST (Dodd-Frank Act Stress Test) is a forward-looking exercise. The supervisor runs the bank's data through its own models under a set of scenarios and publishes results. Banks also run their own stress tests under the same scenarios. CCAR (Comprehensive Capital Analysis and Review) is broader. It checks the bank's whole capital planning process: governance, risk identification, internal controls, and the bank's own projection of capital under stress. It then reviews the planned capital actions, such as dividends, share repurchases and issuance.

The simplest way to remember the difference: DFAST is mainly a quantitative test of capital under supervisory scenarios using common assumptions. CCAR is the supervisory review of the capital plan, using stress results plus qualitative judgement. A bank can pass the numbers and still be criticised on process.

Scenario design has a baseline and one or more adverse and severely adverse scenarios. Supervisors set macroeconomic and market variables such as GDP, unemployment, house prices, equity prices and interest rates over a multi-quarter horizon. Good scenarios are severe, plausible, relevant to the bank's own vulnerabilities, and not simply a repeat of the last crisis. Banks are also expected to build their own scenarios for their specific risks.

Results feed capital planning. The bank projects pre-provision net revenue, loan losses, trading and counterparty losses, and other items. These flow into projected capital. The bank compares the lowest projected ratio with required minimums plus any buffers. If capital would fall short, it must cut distributions, raise capital or change its risk profile. Under the US framework, stress results are also used to set a firm-specific capital buffer. Stress testing is a risk management tool and not only a regulatory exercise. Supervisors expect strong governance, validated models and senior management and board use of the results.

Key formulas to remember

Projected capital ratio
Ratio = Projected capital ÷ Projected risk-weighted assets
Use the stressed capital figure and stressed RWA at each quarter. The minimum ratio over the horizon is the one that matters.
Change in capital over the horizon
Ending capital = Starting capital + Net income (after provisions and losses) − Dividends − Buybacks + Issuance
Net income = pre-provision net revenue − provisions − other losses, adjusted for tax. Capital actions are part of the plan being tested.
Capital depletion
Depletion (percentage points) = Starting ratio − Minimum projected ratio
This is the decline in the ratio at the trough. Distinguish percentage points from percent.
Buffer shortfall test
Shortfall if Minimum projected ratio < Required minimum + buffer
Compare with the correct requirement for each ratio, such as CET1, Tier 1, total capital or leverage.
Programme distinction
CCAR = stress results + capital plan review (qualitative and quantitative); DFAST = supervisory stress test under Dodd-Frank
Know which one looks at capital actions and planning process.

How to solve Stress Testing and Capital Planning (CCAR, DFAST) questions

Use this approach for any question on supervisory stress testing or capital planning.

  1. 1Identify what is asked: programme (CCAR or DFAST), scenario design, a capital calculation, or governance.
  2. 2If it is conceptual, name the scope. Quantitative projection under common scenarios points to DFAST. Capital plan, governance and planned distributions point to CCAR.
  3. 3For scenario questions, check that the scenario is severe, plausible, relevant to the bank's risks and forward-looking.
  4. 4For calculations, build capital step by step: start capital, add stressed net income, subtract dividends and buybacks, add issuance.
  5. 5Compute the stressed risk-weighted assets and the ratio. Find the trough, not just the end value.
  6. 6Compare the ratio with the minimum plus buffer for the right measure (CET1, Tier 1, total or leverage).
  7. 7State the consequence: pass, cut distributions, raise capital or revise the plan.
  8. 8Check the option wording for traps such as percentage points versus percent, or pre-tax versus after-tax.

Quickest way: Capital trough check

When to use it: Use for numerical items asking whether a bank meets its requirement after stress or how much it can distribute.

  1. Write the stressed capital: start + net income − distributions.
  2. Divide by stressed RWA to get the ratio.
  3. Subtract the required minimum plus buffer.
  4. If the gap is negative, convert it to a currency shortfall: gap × RWA.
  5. For conceptual items, eliminate options that confuse CCAR and DFAST scope or call stress tests a historical-only exercise.

Common mistakes in Stress Testing and Capital Planning (CCAR, DFAST)

  • Treating CCAR and DFAST as the same thing

    They are run together and use similar scenarios.

    Fix: Remember that DFAST is the stress test; CCAR also reviews the capital plan, governance and planned capital actions.

  • Using the ending capital ratio instead of the minimum over the horizon

    Candidates take the last quarter as the answer.

    Fix: Test the lowest projected ratio across all quarters. The trough drives the result.

  • Forgetting to deduct planned dividends and buybacks

    Focus is placed on losses only.

    Fix: Include all capital actions in the capital roll-forward before computing the ratio.

  • Confusing percentage points with percent

    A fall from 12% to 9% is described loosely.

    Fix: It is a 3 percentage point decline, which is a 25% relative decline. Read what the option asks.

  • Assuming a severe scenario must replicate the last crisis

    The 2008 crisis is the familiar example.

    Fix: Good scenarios are plausible, forward-looking and tailored to current vulnerabilities, not simply a rerun of history.

  • Seeing stress testing as a one-off compliance exercise

    Results are published by regulators.

    Fix: Supervisors expect integration into risk appetite, capital planning and board decisions, supported by validated models.

Worked examples

Example 1

A bank starts with CET1 capital of $60 billion and risk-weighted assets of $500 billion. Under a severely adverse scenario, it projects cumulative net income of −$12 billion, dividends and buybacks of $8 billion, and no issuance. Stressed RWA is $500 billion. The requirement including buffer is 7.0%. Does the bank meet it, and what is the ratio?

Show the solution
  1. Starting ratio = 60 ÷ 500 = 12.0%.
  2. Ending capital = 60 + (−12) − 8 + 0 = $40 billion.
  3. Stressed ratio = 40 ÷ 500 = 8.0%.
  4. Compare with 7.0%: 8.0% is above the requirement.
  5. Headroom = 1.0 percentage point, or 0.01 × 500 = $5 billion of capital.

Answer: The stressed CET1 ratio is 8.0%, which is above the 7.0% requirement, with $5 billion of headroom.

Example 2

Same bank, but planned distributions are raised to $18 billion. What is the stressed CET1 ratio and does the bank meet the 7.0% requirement? What is the shortfall in dollars if not?

Show the solution
  1. Ending capital = 60 − 12 − 18 = $30 billion.
  2. Stressed ratio = 30 ÷ 500 = 6.0%.
  3. Requirement 7.0% × 500 = $35 billion of capital needed.
  4. Shortfall = 35 − 30 = $5 billion.
  5. Under CCAR logic, the supervisor would object to the capital plan and the bank would cut distributions or raise capital.

Answer: The ratio falls to 6.0%, below 7.0%, a shortfall of $5 billion. The bank must reduce distributions or raise capital.

Exam tips

  • Know the scope split: DFAST is the stress test; CCAR adds the capital plan, governance and planned capital actions.
  • In calculations, always roll capital forward including distributions, then divide by stressed RWA.
  • Scenario design questions reward words such as severe, plausible, forward-looking and bank-specific.
  • Link results to action: restrict distributions, raise capital, or adjust risk appetite and buffers.
  • Watch units: percentage points versus percent, and billions versus millions.

Practice questions from Solvency, Liquidity and Other Regulation After the Global Financial Crisis

Stress Testing and Capital Planning (CCAR, DFAST) in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Stress Testing and Capital Planning (CCAR, DFAST): frequently asked questions

What is the difference between CCAR and DFAST?

DFAST is a forward-looking stress test of capital under supervisory scenarios required under Dodd-Frank. CCAR also reviews the bank's capital planning process and its planned dividends and buybacks. In short, CCAR is broader and includes qualitative assessment.

How do stress tests determine bank capital buffers?

The bank's projected capital decline under the severely adverse scenario shows how much loss-absorbing capacity it needs. In the US framework, supervisors use these results to set a firm-specific buffer above the minimum. Banks that lose more capital under stress face a higher buffer.

What makes a good stress scenario?

It should be severe but plausible, forward-looking and relevant to the bank's own vulnerabilities. It should cover macroeconomic and market variables over a multi-quarter horizon. It should not just replay the last crisis.

Do banks only use supervisory scenarios?

No. Supervisors expect banks to run their own stress tests, including scenarios tailored to their specific risks. Supervisory scenarios give comparability, while internal ones capture individual risk profiles.