In remarks at a conference at the Federal Reserve Bank of Boston today, Fed Vice Chairman for Supervision Randal Quarles highlighted his agency’s efforts to make large bank stress tests more transparent, simple and less volatile.
With respect to transparency, the Fed has already published enhanced disclosures on two of its key stress testing models and expects to publish two additional disclosures each year until all models have been accounted for, Quarles said. The agency is also exploring ways to provide additional transparency around stress test scenarios and scenario design, he added.
Quarles also signaled that the Fed will soon offer its revised proposal for the stress capital buffer, which would help to simplify the Fed’s large bank capital rule. While he emphasized that the buffer “would not reduce the stringency of the regulatory capital framework for large banks,” it would help reduce the number of different capital requirements applicable to large banks.
To address volatility, Quarles offered that the test results could be averaged from previous years to ensure that no single year would have an outsized influence on the amount of capital a bank would be required to maintain, though he noted that such an approach could reduce risk sensitivity and present other technical challenges. “I believe more thinking and discussion of this issue would be fruitful,” he said.