Recent proposals by the Federal Reserve that together attempt to bring more transparency to stress testing exercises mark an “important step” in an ongoing process, the American Bankers Association said in a comment letter today. The association, which has long called for greater transparency and clarity around the stress testing process, noted that the proposals would provide “useful but limited information” about the models the Federal Reserve uses to estimate the hypothetical losses in the stress tests, limited information on the development of hypothetical scenarios and variables and an improved description of the agency’s approach to model development, implementation, use and validation.
The association recommended that the Fed immediately finalize a proposed enhanced disclosure model it would use to estimate hypothetical losses in the stress tests so that the disclosures would apply to this year’s Comprehensive Capital Analysis and Review cycle for the largest banks. In addition, ABA recommended that the Federal Reserve engage in further discussions about how stress tests can be better calibrated based on the individual risk profiles of each institution; release model scenarios and other information no later than January of each year; provide a more detailed proposal for the agency’s approach to scenario design; and eliminate the potential for a qualitative objection from the CCAR for all banks.
ABA also put forth several recommendations for further improvement of the stress testing process — many of which were highlighted in a previous white paper for the U.S. Treasury Department — including those that would allow for greater flexibility around capital actions and balance sheet assumptions and more realistic, tailored tax assumptions. For more information, contact ABA’s Hugh Carney.