Fed unveils ‘package’ of proposals to increase stress-test transparency

A package of proposals intended to increase the transparency of stress testing program while maintaining the ability to test the resilience of the nation’s largest and most complex banks was announced by the Federal Reserve Thursday.

Comments are due Jan. 22.

In particular, the Fed said one of the proposals would release more information about the models it uses to estimate hypothetical losses in stress tests, including as applied in the Comprehensive Capital Analysis and Review (CCAR).

The Fed said information made public for the first time would include:

  • A range of loss rates, estimated using the Fed’s models, for loans held by CCAR firms;
  • Portfolios of hypothetical loans with loss rates estimated by the Fed’s models; and
  • More detailed descriptions of the 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 as to how the Board’s models treat different types of loans under stress, and provide insight into how the annual stress test results are determined,” the central bank said in a release. “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.”

The Fed said it is also seeking comment on a proposed “Stress Testing Policy Statement” describing its approach to model development, implementation, use, and validation. The statement, the Fed said, 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.

The Fed is also proposing to modify its framework for the design of the annual hypothetical economic scenarios. The modifications, the agency said, 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 Board is exploring the addition of variables to test for funding risks in the hypothetical scenarios,” the Fed said.

Federal Reserve Board requests comment on package of proposals that would increase the transparency of its stress testing program