Fed publishes final stress test policy statement, decides in favor of enhanced model disclosures

A final stress testing policy statement by the Federal Reserve Board and a final notification of enhanced disclosure of the models used in the Fed’s supervisory stress test, both approved by the board Feb. 22, were published in the Federal Register Thursday with an effective date of April 1.

The final policy statement addresses the approach to supervisory stress testing conducted under the Fed Board’s stress testing rules and the capital plan rule.

The final policy states that the Fed will maintain independence as a central principle of supervisory stress testing; maintain an emphasis on robustness and stability as key principles of stress testing; and apply conservatism as a central principle of supervisory stress testing. “Accordingly, the final Policy Statement will reflect the Board’s commitment, given a reasonable set of assumptions or approaches, to use those results that result in relatively more significant losses or lower revenue, all other things being equal,” the board said in its notice.

The Fed Board said it is adopting the enhancements in supervisory stress-test model disclosures as proposed, with some modifications, and expects to publish details about the models in the first quarter of each calendar year. “Specifically, the Board expects to publish enhanced model descriptions for all models and enhanced modeled loss rate disclosures for two of the most material loan models in the first quarter of 2019,” it stated. In 2020, it says it plans to revise enhanced model descriptions “as appropriate” and to publish enhanced modeled loss rate disclosures for two additional models.

Also slated for tomorrow’s Register is a Fed notice amending the agency’s policy statement on the stress test scenario design framework.

Stress Testing Policy Statement

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

RR: Fed set to adopt final amendments to policy statement on stress-test scenario design framework (Feb. 27, 2019)