The Federal Reserve Board finalized changes to increase the transparency of its stress testing program for the nation’s largest banks.
The changes are designed to improve public understanding of the program while maintaining its ability to test the resilience of large, complex banks.
One of the key changes will provide more information about the stress testing models used in the Fed board’s annual Comprehensive Capital Analysis and Review (CCAR). That additional information includes ranges of loss rates 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.
The Fed said this additional information would allow banks to evaluate the risks in their portfolios better and compare the losses from their own models to the board’s models. This will begin for the 2019 stress test cycle and expand in subsequent years,
The board also finalized a stress testing policy statement, which describes the board’s approach to model development, implementation, and validation. The statement describes seven principles that have guided supervisory stress test modeling in the past and into the future.
The Fed board also modified its framework for the design of the annual hypothetical economic scenarios. The modifications will give more information on the hypothetical path of the unemployment rate and house prices, both of which are key variables for the scenarios. Further, the board will not add variables to the hypothetical stress test scenario related to funding costs.