Euromoney Fed stress tests: no time to relax


Photo: iStock

Photo: iStock

The big banks operating in the United States have just undergone not one but two stress tests. The first, more formalized, was the regular post-global financial crisis led by the Federal Reserve, as part of its Comprehensive Capital Analysis and Review (CCAR) regime, and its prospective component. associated, Dodd-Frank stress. test (DFAST).

The second, more chaotic, was the Covid.

The real world test informed the hypothetical test. The Fed inserted a series of additional tests in December 2020. And it has tweaked its models to take into account what it calls the “Covid event”, particularly in the automotive and credit card fields, forborne commercial real estate and first mortgages. .

The fact that all the banks have passed the Fed’s tests, despite projecting $ 474 billion in losses in a very adverse scenario, tells us that they seem well prepared for anything the regulator can imagine. But does the fact that they passed the Covid test tell us that they were prepared for it?

Policymakers would do well to keep in mind what stress tests capture and what they do not

For some it is possible. After all, the most diverse banks have been generously rewarded for their exposure to booming market conditions, especially in primary and secondary fixed income businesses and equity markets.

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