Fed policy changes for 2019 aimed at more transparency in stress testing program

Changes intended to provide more transparency in the Federal Reserve Board’s stress testing program for the nation’s largest, most complex banks were approved and announced Tuesday by the central bank.

With these changes, the Fed said it will be providing more information about stress testing models used in the annual comprehensive capital analysis and review (CCAR) in 2019 and after. It also finalized a stress testing policy statement that discloses more about the board’s approach to model development, implementation, and validation; and modified its framework for the design of the annual hypothetical economic scenarios for stress testing.

Regarding CCAR, the Fed said it will provide the following additional information going forward:

  • 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; and
  • 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,” the Fed said in Tuesday’s release. “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.”

Regarding the hypothetical scenarios, the Fed said its 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 key variables for the scenarios. In a change from its proposal, the Fed Board said it 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,” it said.

The stress testing policy statement describes the seven principles that have guided supervisory stress test modeling in the past “and will continue to do so.”

The Fed, as well as the Office of the Comptroller of the Currency (OCC), on Tuesday also released the 2019 stress testing scenarios for 2019. (See story.)

Amendments to Policy Statement on the Scenario Design Framework for Stress Testing

Enhanced Disclosure of the Models Used in the Federal Reserve’s Supervisory Stress Test

Stress Testing Policy Statement

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