FED Amendments to Increase Transparency of Its Stress Testing Program
FED (or the Board) finalized a set of changes that will increase the transparency of its stress testing program for the nation's largest and most complex banks. FED adopted a final policy statement on the approach to supervisory stress testing conducted under its stress testing and capital plan rules. Also finalized was an enhanced disclosure of the models used in the supervisory stress test conducted under FED's Regulation YY and the capital plan rule. Additionally, FED adopted amendments to its policy statement on the scenario design framework for stress testing. These changes will be effective from April 01, 2019.
As part of the enhanced disclosure, the first change, which will begin for the 2019 stress test cycle and expand in subsequent years, will provide significantly more information about the stress testing models used in the Board's annual Comprehensive Capital Analysis and Review (CCAR). That information will include:
- Ranges of loss rates, estimated using the Board's models, for actual loans held by CCAR firms
- Portfolios of hypothetical loans with loss rates estimated by the Board's models
- More detailed descriptions of the Board's models, such as certain equations and key variables that influence the results of the models
Using this additional information, a firm would be better able to evaluate the risks in its own portfolio or compare the losses from its own models to losses from the Board's models. In response to comments received on the proposal from December 2017, the Board will provide additional information on a number of models, including those used to project operational-risk losses and pre-provision net revenue. The model disclosure will be updated each year and published in the first quarter of the year. In addition, FED finalized the stress testing policy statement, which elaborates on prior disclosures by describing the Board's approach to model development, implementation, and validation. The statement describes seven principles that have guided supervisory stress test modeling in the past and will continue to do so.
Finally, FED modified its framework for the design of the annual hypothetical economic scenarios. The modifications will provide more information on the hypothetical path of the unemployment rate and will introduce a quantitative guide for the hypothetical path of house prices, both of which are key variables for the scenarios. In a change from its proposal, the Board will not add variables to the hypothetical stress test scenario related to funding costs. The Board will further explore incorporating stress to certain types of funding into its stress testing program in the future.
Related Links
- Press Release
- Policy Statement on Scenario Design Framework
- Enhanced Disclosure of Models Used in Stress Test
- Stress Testing Policy Statement
Effective Date: April 01, 2019
Keywords: Americas, US, Banking, Stress Testing, Policy Statement, CCAR, Regulation YY, FED
Featured Experts
James Partridge
Credit analytics expert helping clients understand, develop, and implement credit models for origination, monitoring, and regulatory reporting.
Laurent Birade
Advises U.S. and Canadian financial institutions on risk and finance integration, CCAR/DFAST stress testing, IFRS9 and CECL credit loss reserving, and credit risk practices.
Metin Epözdemir
Metin Epözdemir helps European and African banks with design and implementation of credit risk, stress testing, capital management, and credit loss accounting solutions.
Previous Article
FED Releases Scenarios for the CCAR and DFAST Exercises in 2019Related Articles
EBA Analyzes Impact of Unwind Mechanism of Liquidity Coverage Ratio
EBA published a report analyzing the impact of the unwind mechanism of the liquidity coverage ratio (LCR) for a sample of European banks over a three-year period, from the end of 2016 to the first quarter of 2020.
ECB Outlines Views on Possible Changes to AnaCredit Rule and TLTROs
In response to questions from a member of the European Parliament, the ECB President Christine Lagarde issued a letter clarifying the possibility of amending the AnaCredit Regulation and making targeted longer-term refinancing operations (TLTROs) dependent on the climate-related impact of bank loans.
IASB Begins First Phase of Post-Implementation Review of IFRS 9
IASB started the post-implementation review of the classification and measurement requirements in IFRS 9 on financial instruments and added the review as a project to its work plan.
FSB Report Examines Progress in Resolvability of Systemic Institutions
FSB published a report that examines progress in implementing policy measures to enhance the resolvability of systemically important financial institutions.
EBA Benchmarks National Insolvency Frameworks Across EU
EBA published a report on the benchmarking of national loan enforcement frameworks across 27 EU member states, in response to the call for advice from EC.
FSB Reports Assess Impact of Pandemic on Financial Stability
FSB published a letter from its Chair Randal K. Quarles, along with two reports exploring various aspects of the market turmoil resulting from the COVID-19 event.
RBNZ Consults on Implementation of Capital Review Changes
RBNZ launched a consultation on the details for implementing the final Capital Review decisions announced in December 2019.
IASB Announces Andreas Barckow as the New Chair from July 2021
The Trustees of the IFRS Foundation, which are responsible for the governance and oversight of IASB, have announced the appointment of Dr. Andreas Barckow as the IASB Chair, effective July 2021.
HKMA Consults on Capital Rules for Bank Equity Investments in Funds
HKMA issued a letter to consult the banking industry on a full set of proposed draft amendments to the Banking (Capital) Rules for implementing the Basel standard on capital requirements for banks’ equity investments in funds in Hong Kong.
ESRB Supports Extension of Macro-Prudential Measure by Swedish FSA
ESRB published an opinion assessing the decision of Swedish Financial Supervisory Authority (FSA) to extend the application period of a stricter measure for residential mortgage lending, in accordance with Article 458 of the Capital Requirements Regulation (CRR).
