Federal Reserve Requests Comments on Proposals to Increase Transparency of Its Bank Stress Testing Program

The Federal Reserve Board recently requested comments on a trio of proposals to increase the transparency of its bank stress testing program.

The Federal Reserve’s stress testing program serves to determine whether large financial institutions are sufficiently capitalized to withstand severe—but plausible—economic downturns, while still meeting their obligations to creditors and continuing to lend to consumers and businesses.

Under the first proposal, the Federal Reserve proposes providing enhanced descriptions of supervisory models, including key variables, modeled loss rates on loans grouped by important risk characteristics and summary statistics associated with the loans in each group, and portfolios of hypothetical loans and the estimated loss rates associated with the loans in each portfolio.  The agency seeks comments on the potential benefits and risks of the increased disclosures, whether the increased disclosures would allow for greater public and academic input on the soundness of the models, how to limit any risks from the increased disclosures, and whether there are other disclosures which would be more helpful.

Under the second proposal, the Federal Reserve seeks comments on the design of its stress testing scenarios.  Specifically, the agency seeks information with respect to how to account for factors such as unemployment, housing prices, and changes in banks’ ability to borrow money.

Finally, the Federal Reserve is considering a new policy statement on stress testing.  The policy statement serves to lay out the agency’s principles that guide the design of the stress tests and approaches to supervisory modeling, describe the governing policies and implementation of the stress test program, and establish the principles and policies for the validation of models used in the stress tests.

Comments will be accepted through January 22, 2018.

For copies of the Federal Reserve’s press release and the new proposals, click HERE.