Fed gives banks more stress test information, unveils 2019 scenarios, Latest Business News - The New Paper

Fed gives banks more stress test information, unveils 2019 scenarios

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WASHINGTON The Federal Reserve moved on Tuesday to make its stress testing of large banks more transparent, providing financial firms significantly more information about how their portfolios would perform under potential economic shocks.

During the 2019 round of stress tests and going forward, big banks will know "significantly more" information about the models the US central bank uses to test banks' books, including how hypothetical loans perform under the tests and more detailed information about the Fed's models.

The 2019 tests will include factoring in a jump to 10 per cent unemployment from the current 4 per cent rate, as well as elevated stress in corporate loan and commercial real estate markets in the most severe scenario. The transparency changes, first proposed by the Fed in 2017 and finalised on Tuesday, are aimed at long-running bank complaints that the current stress-testing process is cumbersome and opaque.

In addition, less complex banks with assets between US$100 billion (S$135 billion)and US$250 billion, such as SunTrust Banks and Fifth Third Bancorp will not have to face the 2019 tests, as the Fed is moving to a two-year cycle for testing those firms.

The industry had been tracking the 2019 testing closely, as Fed officials have said they would like to make the tests more accommodating, amid bank gripes that prior rounds have been harsh and resource-intensive.

The steps the Fed is taking to make the testing more transparent should address some of those concerns, although proponents of stricter rules on Wall Street caution too much transparency could allow banks to mask underlying risks by gaming the exam.

The annual test of bank stability subjects the books of large banks like JPMorgan Chase and Citigroup to hypothetical economic downturns to ensure they can withstand the blow without collapsing. - REUTERS