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Fed proposes to disclose more information on how it conducts stress tests

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Fed proposes to disclose more information on how it conducts stress tests

The Federal Reserve Board outlined proposed changes Dec. 7 aimed at giving the nation's largest banks more information on how the agency conducts stress tests, saying doing so would help the public better understand key measures of institutions' stability.

The proposal follows complaints from institutions that they do not have enough information on the assumptions Fed officials make when determining whether institutions have enough capital to endure an economic downturn.

The Fed's proposals include publicizing some of the key variables it uses in developing its models for the Comprehensive Capital Analysis and Review, or CCAR, developed after the financial crisis. Thirty-four firms had to go through the Fed-conducted CCAR tests this year.

"This enhanced transparency will bolster the credibility of our stress tests and help the public better evaluate the results," said Randal Quarles, the Fed's vice chairman for supervision. "The proposed changes will also generate valuable insight from stakeholders and we look forward to it."

The Fed would also disclose the "estimated loss rates for groups of loans with distinct characteristics," such as whether loans are investment-grade, which the agency said would help the public evaluate how such assets would perform during downturns. And it would publish a portfolio of hypothetical loans that institutions would then be able to fold into their projections.

Still, the Fed said it had to be cautious about disclosing too much information, warning it could lead to institutions making "modifications to their businesses that change the results of the stress test without
changing the risks they face."

"In the presence of such behavior, the stress tests could give a misleading picture of the actual vulnerabilities faced by firms," the Fed said in explaining the change. "Further, such behavior could increase correlations in asset holdings among the largest banks, making the financial system more vulnerable to adverse financial shocks."

The announcement reflects another move from the Fed to ease some of the burdens of stress tests. This year, the Fed exemptedsome bank holding companies with less than $250 billion in total consolidated assets from the qualitative portion of CCAR, though they are still subject to the quantitative tests.

The Fed is seeking public comments on the proposed changes, along with two other related proposals. One would adjust the Fed's "Stress Testing Policy Statement" to reflect the added disclosures, while the other would add more details to the hypothetical economic scenarios the Fed uses in the tests.

The Fed is taking comments on the package until Jan. 22.