Federal Reserve Requests Comments on Proposals Seeking Transparency Increases in Stress Testing Programs

Agency Rule-Making & Guidance Federal Issues Federal Reserve Stress Test CCAR

The Federal Reserve Board (Fed) issued a request for comments on three proposals designed to increase stress testing transparency while also testing the resiliency of large, complex banks. Earlier in June, Fed Chair Janet Yellen underscored the Fed’s understanding of the need to provide transparency in its Comprehensive Capital Analysis and Review (CCAR) process and stress test scenarios. (See previous InfoBytes coverage here.) The first December 7 proposal, “Enhanced Disclosure of the Models Used in the Federal Reserve’s Supervisory Stress Test,” announces the Fed’s plans to publicly release, for the first time, information concerning the models and methodologies used during supervisory stress tests, including those applied in the CCAR, including:

• “enhanced descriptions of supervisory models, including key variables;”
• “modeled loss rates on loans grouped by important risk characteristics and summary statistics associated with the loans in each group;” and,
• “portfolios of hypothetical loans and the estimated loss rates associated with the loans in each portfolio.”

The information will offer banks expanded details as to how the Fed’s models treat different types of loans under stress, along with insight into the determination of annual stress test results.

The second request for comments concerns the “Stress Testing Policy Statement,” which elaborates on prior disclosures and outlines details on the principles and policies that govern the Fed’s development, implementation, and validation of its stress testing models.

Finally, the Fed issued a proposed policy statement to request comments on introduced amendments to the design of its annual hypothetical economic scenarios framework. The “Amendments to Policy Statement on the Scenario Design Framework for Stress Testing” is intended to enhance transparency and provide clarification on hypothetical economic scenarios, including the direction of housing prices, as well as the Fed’s commitment to exploring additional variables to test for funding risks.

All comments must be received by January 22, 2018.