Staff Reports
The Capital and Loss Assessment under Stress Scenarios (CLASS) Model
February 2014  Number 663
JEL classification: G21, G17, G01

Authors: Beverly Hirtle, Anna Kovner, James Vickery, and Meru Bhanot

The CLASS model is a top-down capital stress testing framework that projects the effect of different macroeconomic scenarios on U.S. banking firms. The model is based on simple econometric models estimated using public data and also on assumptions about loan loss provisioning, taxes, asset growth, and other factors. We use this framework to calculate a projected industry capital gap relative to a target ratio at different points in time under a common stressful macroeconomic scenario. This estimated capital gap began rising four years before the financial crisis and peaked at the end of 2008. The gap has since fallen sharply and is now significantly below precrisis levels. In the cross-section, firms projected to be most sensitive to macroeconomic conditions have higher capital ratios, consistent with a “precautionary” view of bank capital.

Available only in PDF pdf  55 pages / 751 kb
Author disclosure statement(s)
E-mail Alerts