Fed asks for guidance on ‘stress tests’

The Federal Reserve has asked the nation’s financial institutions to weigh in on how to best structure the “stress tests” that will evaluate their vulnerabilities to financial shocks.

The Fed has already released the overarching capital requirements for banks and the hypothetical “baseline, adverse and severely adverse scenarios” for the stress tests, and is reaching out to banks for input about carrying them out.

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The central bank published a notice in the Federal Register that says the Fed “does not envision that the approach used to develop [stress-test] scenarios would change from year to year” and that “the characteristics of the scenarios provided to companies would reflect changes … to specific risks or vulnerabilities.” 

Further, the Fed noted that the various stress-test scenarios are purely hypothetical and intended to gauge the preparedness of financial institutions in the event of another crisis or recession. The bank says the tests “should not be regarded as forecasts” about likely economic outcomes.

This notice is the first time the Federal Reserve has asked banks for feedback on the stress-test process, including what factors could indicate an “adverse” or “severely adverse” scenario and how best to structure the framework that will be used.

Scott Talbott, the vice president of the Financial Services Roundtable, said the banking industry is involved “in uncharted territory, as it relates to these types of stress tests.” Banks regularly share information with regulators, including the Federal Reserve.

But stress tests, which are designed to “minimize the overall impact” of an economic downturn, remain a “black box” on the Fed’s end, Talbott said.

“We’re both engaged in a hypothetical exercise,” he said, and there is an effort to figure out the equations both sides are using so they “can work together to understand the hypothetical impact of the assumptions.”

Comments to the Federal Reserve on the stress tests are due by Feb. 15.

SECURITIES AND EXCHANGE COMMISSION: The Securities and Exchange Commission (SEC) has submitted a list of proposed rules to the Office of Management and Budget (OMB) for final approval.

Included in the submission is a regulation that would require investment companies that specialize in a particular industry and region to invest “invest at least 80 percent” of assets “in the type of investment suggested by the name.” The rule would also apply to nonprofits, according to the Federal Register.

Another SEC rule submitted to OMB would require “exchange members, brokers and dealers” to electronically submit securities transaction information — stocks, bonds, collateralized debt obligations and other financial instruments — to the SEC upon request. The Federal Register publication states this would assist “enforcement investigations and other trading reconstructions.” The required information is extensive and would likely have an impact on the ability of the agency to piece together the buying and selling of complex financial products. Currently, transaction records are required, but this marks a switch to electronic submission to the agency and moves toward the ability to track electronic trading.

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• The Department of Housing and Urban Development has issued a notice listing federal buildings nationwide that could be used as facilities to “assist the homeless,” pending further review and possible renovations.

• The Department of Veterans Affairs has posted a proposed rule that would allow some veterans to be qualified for non-VA care in instances where VA outpatient care is inaccessible or the VA cannot provide the needed care. Comments are due by Dec. 28.