TCH Offers Recommendations to Improve Stress Testing Transparency
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.
First, TCH describes how the extent of the information that the Federal Reserve proposes to disclose about its models are insufficient, and recommends disclosure of all material aspects of its models, including underlying formulas and equations, for all models used in its stress testing and capital planning framework.
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 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.