What Is the Supervisory Capital Assessment Program (SCAP)?

The Supervisory Capital Assessment Program (SCAP) was a financial stress test of America's largest banks, conducted by the Federal Reserve System one time only, in the midst of the financial crisis of 2008-2009.

The test was an assessment of the capital buffers of U.S. banking institutions undertaken in the spring of 2009. It was intended to measure the financial strength of the nation's 19 largest financial institutions moving forward.

Key Takeaways

  • The SCAP test was conducted one time only, in the midst of the financial crisis of 2008-2009.
  • The test measured the ability of America's biggest banks to withstand another extreme but hypothetical future crisis.
  • Ten of the 19 "too big to fail" banks were found to have inadequate capital to meet another crisis.

The financial crisis had left many banks and institutions severely undercapitalized, and the stress tests were intended to show how well the banking sector could withstand the impact of a major economic downturn.

How SCAP Worked

The stress tests were conducted only on banking institutions with assets over $100 billion. These were essentially the banks which the Fed considered "too big to fail."

Federal banking supervisors sought to determine whether each of these institutions had a sufficient cash buffer to withstand losses while continuing to provide customers with access to credit. The stress test used a baseline scenario to measure each institution's Tier 1 common capital, or available cash reserves. The institutions also were tested for their performance against a hypothetical and extreme scenario, a kind of worst-case scenario.

Banks could receive any of five grades:

  • Well-capitalized
  • Adequately capitalized
  • Undercapitalized
  • Significantly undercapitalized
  • Critically undercapitalized

A Hypothetical SCAP Test

The stress tests tested the banks' hypothetical performance in a set of scenarios, some worse than others. For example, a stress test might ask, what if all of the following happened at the same time: A 10% unemployment rate, a 20% drop in the stock market, and a 40% decline in home prices nationwide. Each bank was instructed to use the next nine quarters of its projected financials to determine whether they would have enough capital to make it through the simulated crisis.

What the Fed Found

When testing was complete, the final results showed that 10 of the 19 tested banks would have had inadequate capital to meet their business needs during a financial crisis.

However, every bank which underwent testing met the legally mandated capital requirements.

The Fed released the scores of the banks which underwent the stress tests to the public. Banks which failed the stress tests came across poorly to the public.

The tests overall helped to identify any possible looming threats of economic disaster within the banking sector. The results put pressure on the banks to keep higher reserves on hand in the event of another financial crisis.