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    FED Corrects Stress Test Results, Revises Bank Capital Requirements

    September 04, 2020

    FED released corrected stress test results stemming from an error in projected trading losses. Consequently, FED revised the capital requirements for two banks—The Goldman Sachs Group, Inc. and Morgan Stanley. FED identified the error and all results affected by it, corrected those results, and implemented changes to prevent similar errors in the future. The related stress test results documents have also been updated. These documents include results of the Dodd-Frank Act Stress Test (DFAST) for 2020 and results of a sensitivity analysis that explored the vulnerabilities of banks to the downside risks to the economy posed by the COVID-19 outbreak.

    FED highlighted that the loss rates for certain public welfare investments made by large banks were initially miscalculated, resulting in an overestimation of hypothetical losses for those investments. The error affected five banks—Citigroup Inc, The Goldman Sachs Group Inc, HSBC North America Holdings Inc, Morgan Stanley, and Wells Fargo & Company. However, the resulting common equity tier 1, or CET1, capital requirements for three firms (Citigroup Inc, HSBC North America Holdings Inc, and Wells Fargo & Company) were unaffected, while the CET1 capital requirements for the remaining two firms were revised. In its review of the loss models used for certain public welfare investments, FED identified other model components that were similarly implemented and has conducted additional reviews, which found no further implementation errors.

     

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    Keywords: Americas, US, Banking, Stress Testing, Dodd Frank Act, DFAST, Sensitivity Analysis, COVID-19, Stress Test Results, Regulatory Capital, CET1, FED

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