Quarles: Extended stress test cycle for lower-risk firms will inform move to ‘permanently longer’ cycle

The Federal Reserve’s experience this year with an extended stress test cycle for lower-risk firms will help inform the central bank’s move to a permanently longer testing cycle, which will be addressed as part of a full notice and comment process, the Federal Reserve’s top supervision official said Wednesday.

Speaking in New York City before the Council for Economic Education, Quarles noted the role of stress testing a decade ago in helping to stabilize the financial system and changes being made now under last year’s regulatory reform law (the Economic Growth, Regulatory Relief, and Consumer Protection Act, or EGRRCPA).

The extended stress testing cycle for lower-risk banking organizations – those with total assets between $100 billion and $250 billion – both provides relief and recognizes the different risks that these firms typically pose, especially compared to the largest, most complex firms whose failure “poses the greatest risk to the real economy,” Quarles said. “Even with this change, the stress tests remain a core part of our supervision of these firms.”

Quarles said the public research conference scheduled in July on the transparency and effectiveness of stress testing – titled “Stress Testing: A Discussion and Review,” and hosted by the Fed – will help to further inform “the evolution” of the stress-testing framework.

“Ten years have passed since the Federal Reserve conducted its first supervisory stress tests,” he said. “That initial experiment helped stabilize financial markets and shore up our banking system at a critical and uncertain time. Our challenge now is to preserve the strength of the test, while improving its efficiency, transparency, and integration into the post-crisis regulatory framework.”

First announced in January, the July conference, “Stress Testing: A Discussion and Review,” will be hosted by the Fed and include panel discussions among presenters with industry, academic, and regulatory backgrounds; papers for the conference will also be published to fuel further research.

Fed Vice Chairman for Supervision Randal Quarles on “Inviting Participation: The Public’s Role in Stress Testing’s Next Chapter,” Feb. 6, 2019, before the Council for Economic Education, New York, N.Y.

RR: Fed, OCC release scenarios for 2019 CCAR, stress-test exercises (Feb. 5, 2019)

RR: Fed stress testing framework to be examined during July public research conference (Jan. 28, 2019)