December 07, 2017

Federal Reserve Board requests comment on package of proposals that would increase the transparency of its stress testing program

For release at 3:00 p.m. EST

The Federal Reserve Board on Thursday 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.

Together, this information would provide significantly more detail as to how the Board's models treat different types of loans under stress, and provide insight into how the annual stress test results are determined. For example, a firm subject to CCAR could use this information to better understand and evaluate risks in its own portfolio or compare the losses from its own models to the losses from the Board's models. The information would be published prior to the start of CCAR each year.

"This enhanced transparency will bolster the credibility of our stress tests and help the public better evaluate the results," Vice Chairman for Supervision Randal K. Quarles said. "The proposed changes will also generate valuable insight from stakeholders and we look forward to it."

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.

Comments on the measures will be accepted through January 22, 2018.

For media inquiries, call 202-452-2955.

Last Update: December 15, 2017