Federal Reserve to Make Stress Testing More Transparent

Posted June 21, 2017

On June 16, 2017, Federal Reserve Chair Janet Yellen sent a letter to Rep. Blaine Luetkemeyer (R-Mo.), stating that the Fed will make its stress testing for banks more transparent. She cautioned however, that disclosure of all details of the central bank’s modeling on the annual exams could lessen their effectiveness. "There would also be a risk of increased correlations in asset holdings among large banks, making the financial system more vulnerable to adverse economic shocks," Yellen wrote.
The Fed is currently weighing different approaches for providing more information to banks about the agency's modeling. "One way to do so would be to publish loss information for more asset categories than are currently included in the Federal Reserve's stress test results disclosure," Yellen stated in the letter to Rep. Luetkemeyer. "Another would be to publish a set of hypothetical portfolios with modeled losses on those portfolios." Methods for such disclosures are in development and the Fed will reach out for public comments in the coming months.
Yellen stated that the Fed will release instructions and scenarios for the stress tests by Feb. 15 and will provide more information about its qualitative assessments after this year's tests.
The Fed will begin releasing 2017 test results on June 22 for Dodd-Frank-mandated stress tests, and will announce results for the Comprehensive Capital Analysis and Review (CCAR) tests, (which will dictate if banks will be able to pursue capital distribution plans), on June 28.
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