The Clearing House (TCH) published a new research note, “Fed’s versus banks’ own models in stress testing: what have we learned so far?” that analyzes the results of the supervisory stress tests obtained using the Fed’s models relative to the results obtained using banks’ own models under the Dodd-Frank Act stress tests over the past 5 years. The analysis finds: (i) banks’ projections of pre-tax net income are on average more pessimistic than the Fed’s projections, particularly for revenues under stress; (ii) the Fed projects that asset and loan balances grow over the stress horizon, with a resulting increase in risk-weighted assets, while banks assume that their balance sheets shrink due to a decrease in loan demand during a severe recession, with a resulting decrease in risk-weighted assets; and (iii) the disagreement between banks’ own projections and the Fed’s are persistent but only predictable in part.
You Might Also Be Interested In...
Bank Capital and Stress Testing Basel Finalization: The History and Implications for Capital Regulation – Part III
Bank Capital and Stress Testing Basel Finalization: The History and Implications for Capital Regulation – Part II
Bank Capital and Stress Testing Basel Finalization: The History and Implications for Capital Regulation – Part I
More Posts by This Author
Bank Capital and Stress Testing As U.S. Regulators Implement the 2017 Basel Accord, It’s Time for a Reality-Based Assessment of Current Capital Levels
Bank Capital and Stress Testing DFAST 2022: Volatility, Capital Increases, and the Implications for the U.S Economy