GAO includes written comms with banks on alternative data, stress test matters in open priority recommendations to Fed

Coordination with other federal banking regulators on financial technology (fintech) firms’ use of alternative data, better communication on issues related to post-stress capital ratios, and a process to articulate certain risk tolerance levels are urged in three open recommendations in a congressional watchdog report Thursday for the Federal Reserve Board.

The alternative data recommendation, dating back to December 2018, mirrors the one described earlier this week in a GAO report for the Federal Deposit Insurance Corp. (FDIC). “To fully implement our recommendation, the Federal Reserve needs to provide – in coordination with other federal banking regulators and CFPB [the Consumer Financial Protection Bureau] – written communication that gives banks in relationships with fintech lenders specific direction on the appropriate use of alternative data in the underwriting process,” the Thursday report states.

The other two open recommendations, which date back to November 2016, are intended to “improve the Federal Reserve’s ability to manage model risk and ensure that decisions based on supervisory stress test results are informed by an understanding of model risk.” They are:

  • Design and implement a process to communicate information about the range and sources of uncertainty surrounding post-stress capital ratio estimates, during capital analysis and review (CCAR) deliberations.
  • Design and implement a process for the Fed Board and senior staff to articulate tolerance levels for key risks identified through sensitivity testing and for the degree of uncertainty in the projected capital ratios.

Fed staff in April told the GAO that they are continuing work on both recommendations, noting efforts under way to complete “related projects to test and document the sensitivity and uncertainty of post-stress capital ratios,” work that will support completion of the recommendations, the report notes. It said documentation on these projects would be provided “later this year.”

GAO-21-467PR: Priority Open Recommendations: Board of Governors of the Federal Reserve System

RR: Written communication on alternative data needed by regulators to fintechs, GAO says in report (June 1, 2021)

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