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December 07, 2017

FED requested comment on a package of proposals that would increase the transparency of its stress testing program while maintaining the FED’s ability to test the resilience of the nation's largest and most complex banks. Comment period on the measures ends on January 22, 2018.

FED is seeking comment on a proposed "Stress Testing Policy Statement" describing its approach to model development, implementation, use, and validation. This statement would elaborate on prior disclosures and would provide details on the principles and policies that guide the Board's development of its stress testing models. Additionally, FED is proposing to modify its framework for the design of the annual hypothetical economic scenarios. The modifications aim to enhance transparency and to further promote the resilience of the banking system throughout the economic cycle. In particular, the revisions include more information on the hypothetical path of house prices as well as notice that the FED is exploring the addition of variables to test for funding risks in the hypothetical scenarios. In response to feedback, one of the proposals would release greater information about the models the FED uses to estimate the hypothetical losses in the stress tests, including as applied in the Comprehensive Capital Analysis and Review (CCAR). In particular, the following information would be made public for the first time:

  • A range of loss rates, estimated using the Board's models, for loans held by CCAR firms
  • Portfolios of hypothetical loans with loss rates estimated by the Board's models
  • More detailed descriptions of FED's models, such as certain equations and key variables that influence the results of those models

Together, this information would provide significantly more detail on how the FED's models treat different types of loans under stress and provide insight into how the annual stress test results are determined. For example, a firm subject to CCAR could use this information to better understand and evaluate risks in its own portfolio or compare the losses from its own models to the losses from the Board's models. The information would be published prior to the start of CCAR each year.

 

Related Link: Press Release and Consultation Documents

 

Comment Due Date: January 22, 2018

Keywords: Americas, US, Banking, Basel III, Stress Testing, CCAR, FED

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