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How coronavirus could alter Feds thinking about stress tests

May 28, 2020, American Banker

Jeremy Newell is quoted in the American Banker regarding the Federal Reserve’s plan to publish stress tests results of banks’ pre-coronavirus condition. According to Mr. Newell, “It could be that the Fed could take the sensitivity analysis, and if they saw results that were especially concerning for them, use that as the basis of individual engagement with a financial institution around its capital plan, as opposed to formally incorporating it into CCAR.”

He says, “If the function of the CCAR exercise is to provide more transparency and confidence to the market, that might suggest results of the sensitivity analysis will be released publicly. If the goal really is a supervisory assessment designed to better the Fed’s understanding of the financial situation of the firm, that would likely be like all other aspects of the supervisory process, confidential and supervisory in nature.”

He adds that although the coronavirus won’t alter the core stress-testing processes and scenarios this year, it could be something to look out for in the future. “I’d certainly expect that the current economic stress will be used to inform and ideally improve CCAR going forward. The goal of the CCAR stress scenarios has never been to predict what the next crisis looks like, given that that’s an impossible and futile task, and instead designed to be a hypothetical exercise, based on what we know from past severe recessions more broadly,” he says.

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