Fed releases more info on its stress-test models

A document providing additional information on the Federal Reserve’s stress test models, aimed at improving public understanding of the stress tests of large banking institutions, was released by the Fed Thursday.

The document’s release, the Fed said, follows an announcement in February that the Fed Board had finalized changes intended to increase the transparency of its stress tests without compromising their ability to test the resiliency of the nation’s largest banks.

Stress tests ensure that banks have adequate capital to absorb losses and retain their ability to lend to households and businesses even in a severe recession. Required under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the stress tests are one component of the Fed’s stress testing program along with the Comprehensive Capital Analysis and Review (CCAR), which evaluates the capital planning processes and capital adequacy of the largest bank holding companies.

The document released Thursday, about 80 pages long and with more than 30 tables, “provides significantly more information on the stress test models that are used to project bank losses, compared to disclosures from past years,” the agency said.

The additional information consists of:

  • Ranges of loss rates, projected using the Federal Reserve’s models, for loans that are grouped by distinct risk characteristics;
  • Portfolios of hypothetical loans with loss rates projected by the Federal Reserve’s models; and
  • Enhanced descriptions of the Federal Reserve’s models.

“In particular, the additional information on loss rates is provided for the models used for corporate loans and credit cards. These two models accounted for roughly half of total projected loan losses in the Federal Reserve’s 2018 stress test. Similar information will be provided in 2020 for two additional models,” the agency said.

Federal Reserve Board releases document providing additional information on its stress testing program

Fed links:

Supervisory Stress Test Methodology and Results (PDF)

Cards High Risk (CSV)

Cards Low Risk (CSV)

Cards Typical (CSV)

Corporate High Risk (CSV)

Corporate Low Risk (CSV)

Corporate Typical (CSV)

Data Definitions