Ray of light

7 December 2017 By Gina Chon Follow @GinaChon

The central bank wants to provide more information about its models for loan losses and other inputs in the annual exams. That would suit lenders who complain the process is too opaque. But the Fed would retain some mystery, striking a balance that boosts the test’s credibility.

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The U.S. Federal Reserve issued a proposal to increase transparency in the annual stress tests for the largest banks. The plan would make public for the first time certain details of internal models the Fed uses, including loan-loss rates.

The Fed is also seeking comment on its “Stress Testing Policy Statement,” which describes its approach to model development, implementation, use, and validation. The board also proposes to modify the hypothetical economic scenarios under which banks are tested. The revisions include more information on housing-price scenarios. The Fed is also considering adding more variables to the test for funding risks in stress situations.

These are the first suggestions of major regulatory changes under Randal Quarles, the central bank’s new vice chair of supervision. “This enhanced transparency will bolster the credibility of our stress tests and help the public better evaluate the results,” Quarles said. The Fed will seek public comment until Jan. 22, 2018 before the measures are finalized.

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