The Clearing House Offers Recommendations to Improve Stress Testing Transparency

The Clearing House Offers Recommendations to Improve Stress Testing Transparency


Washington, DC – January 23, 2018 – Late yesterday, The Clearing House (TCH) submitted a comment letter on the Federal Reserve’s draft proposals to increase the transparency of the stress testing and capital planning framework.  TCH’s letter highlights the need for significantly greater public transparency into key aspects of the Federal Reserve’s stress testing and capital planning framework and offers three recommendations to improve transparency that aim to ensure stress testing continues to serve its prudential purposes but better promotes economic growth, vibrant capital markets, and the global competitiveness of the U.S. banking system.

“The Federal Reserve’s current approach to CCAR stress testing significantly impairs firms’ ability to manage their businesses by allocating capital efficiently and effectively, which in turn inhibits economic growth and vibrant capital markets and reduces the global competitiveness of the U.S. banking system,” Greg Baer, President of The Clearing House Association wrote in the letter to the Federal Reserve.

To address these opportunities for improvement to the stress testing framework, TCH focuses on three overarching policy concerns.  First, TCH describes how the extent of the information that the Federal Reserve proposes to disclose about its models are insufficient, and recommends the Federal Reserve disclose all material aspects of its models, including underlying formulas and equations, and do so for all models it uses in its stress testing and capital planning framework.  TCH also evaluates the concerns expressed by the Federal Reserve that greater transparency could result in “gaming” of the models, and describes why these concerns are unfounded and fail to appropriately recognize that banks’ alignment and compliance with the stress testing framework supports, rather than undermines, that framework’s goals.

Second, the letter explains that the Federal Reserve’s proposed new Stress Testing Policy Statement continues to require economic stress scenarios that are overly severe and particularly implausible when coupled with the global market shock and counterparty default scenario components, as well as the Federal Reserve’s balance sheet, risk-weighted asset and CCAR capital action assumptions and recommends that the Federal Reserve revise the overall framework for determining the change in the peak unemployment rate and rate of change in the unemployment rate, as well as the change in house prices, to be more consistent with historical experience.

Finally, TCH  observes that there are considerable benefits to shifting to a framework in which CCAR outcomes are primarily based on the results of unique internal models of each firm which are more risk-sensitive, more tailored, more precise, and subject to robust internal controls and independent Federal Reserve supervision.

TCH also provides a brief description of necessary CCAR improvements that are beyond the scope of the proposals but nonetheless important changes that should be made to CCAR and the capital plan framework.

About The Clearing House.  The Clearing House is a banking association and payments company that is owned by the largest commercial banks and dates back to 1853.  The Clearing House Payments Company L.L.C. owns and operates core payments system infrastructure in the United States and is currently working to modernize that infrastructure by launching a new, ubiquitous, real-time payment system.  The Payments Company is the only private-sector ACH and wire operator in the United States, clearing and settling nearly $2 trillion in U.S. dollar payments each day, representing half of all commercial ACH and wire volume.  Its affiliate, The Clearing House Association L.L.C., is a nonpartisan organization that engages in research, analysis, advocacy and litigation focused on financial regulation that supports a safe, sound and competitive banking system.