FRB puts out comment call for stress testing transparency

FRB puts out comment call for stress testing transparency

The Federal Reserve Board requested comment on a package of proposals that would increase the transparency of its stress testing program while maintaining the Federal Reserve’s ability to test the resilience of the nation’s largest and most complex banks.

In response to feedback, one of the proposals would release greater information about the models the Federal Reserve uses to estimate the hypothetical losses in the stress tests, including as applied in the Comprehensive Capital Analysis and Review (CCAR). In particular, the following information would be made public for the first time:

  • A range of loss rates, estimated using the Board’s models, for loans held by CCAR firms;
  • Portfolios of hypothetical loans with loss rates estimated by the Board’s models; and
  • More detailed descriptions of the Board’s models, such as certain equations and key variables that influence the results of those models.

The Board is also seeking comment on a proposed “Stress Testing Policy Statement” describing the Board’s approach to model development, implementation, use, and validation. This statement would elaborate on prior disclosures and would provide details on the principles and policies that guide the Board’s development of its stress testing models.

Additionally, the Board is proposing to modify its framework for the design of the annual hypothetical economic scenarios. The modifications aim to enhance transparency and to further promote the resilience of the banking system throughout the economic cycle. In particular, the revisions include more information on the hypothetical path of house prices as well as notice that the Board is exploring the addition of variables to test for funding risks in the hypothetical scenarios.

Read the full release

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