US Federal Reserve efforts to improve stress tests by measuring shocks to the whole financial system will likely be hobbled by a recent deregulatory law that shrinks the universe of available test data.
Fed Governor Lael Brainard said last month that the Fed is experimenting with ways to look at the impact not only of a direct jolt to a particular bank but also at “second-round” waves to it from other stressed firms and markets.
“The kind of systemic interactions we saw in the crisis are only imperfectly captured in stress tests,” she said.
But a Fed researcher has warned that a 2018 law that reduces the number of regional banks subject to stress tests, as well as the frequency of these exercises, could dilute the effectiveness of any systemic tests.
Fed working at cross purposes on stress-test development
9 January 2019 9:27pm