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.
Related Articles
BIS Report Notes Existing Gaps in Climate Risk Data at Central Banks
A Consultative Group on Risk Management (CGRM) at the Bank for International Settlements (BIS) published a report that examines incorporation of climate risks into the international reserve management framework.
EBA Publishes Multiple Regulatory Updates for Regulated Entities
The European Banking Authority (EBA) published the final guidelines on liquidity requirements exemption for investment firms, updated version of its 5.2 filing rules document for supervisory reporting, and Single Rulebook Question and Answer (Q&A) updates in July 2022.
APRA Consults on Prudential Standard for Operational Risk
The Australian Prudential Regulation Authority (APRA) is seeking comments, until October 21, 2022, on the introduction of CPS 230, which is the new cross-industry prudential standard on operational risk management.
EC Amends Rule on Securitizations; ESRB Updates Reciprocation Measures
The European Commission published a Delegated Regulation 2022/1301 on the information to be provided in accordance with the simple, transparent, and standardized (STS) notification requirements for on-balance-sheet synthetic securitizations.
APRA Announces Revisions to Capital Framework for Banks
The Australian Prudential Regulation Authority (APRA) is announced revisions to the capital framework for authorized deposit-taking institutions to implement the "unquestionably strong" capital ratios and the Basel III reforms.
EBA Examines Remuneration Data and Use of Large Exposure Exemptions
The European Banking Authority (EBA) published a report that examines the use of certain exemptions included in the large exposures regime under the Capital Requirements Regulation (CRR).
UK Authorities Publish Discussion Paper on Critical Third Parties
The Bank of England (BoE), the Prudential Regulation Authority (PRA), and the Financial Conduct Authority (FCA) published a joint discussion paper that sets out potential measures to oversee and strengthen the resilience of services provided by critical third parties to the financial sector in UK.
BoE Issues Update on Ongoing Data Transformation Program
The Bank of England (BoE) issued a communication to firms to provide an update on the progress of the joint data transformation program—which is being led by BoE, the Financial Conduct Authority (FCA), and the industry—for the financial sector in UK.
EBA Issues Draft Methodology and Templates for 2023 Stress Tests
The European Banking Authority (EBA) published the draft methodology, templates, and template guidance for the European Union-wide stress test in 2023.
EBA Issues SREP Guidelines and Standards for Investment Firms
The European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) jointly published the final guidelines on common procedures and methodologies for the supervisory review and evaluation process (SREP) for investment firms.
