The US bank stress-test process is being integrated into the Federal Reserve’s year-round supervision of the financial institutions, rather than being squeezed into a months-long sprint each year, the Wall Street Journal reported.
Regulators will make some adjustments in the test process to guard against future meltdowns in the banking industry, according to the report.
“It’s changing the way people think about supervision,” Fed governor Daniel Tarullo, who oversees the process and helped develop it, was quoted as saying in an interview. “I’m not sure we could have foreseen how important a supervisory tool it would become.”
As part of the tests, Fed computer models are used to determine how much each bank would lose under hypothetical recession scenarios, and the Fed then evaluates whether the banks would have enough capital to absorb those losses and still conduct business.
“It allows us to vary the scenarios from year to year taking into account the kinds of risks that may have arisen,” Tarullo said.
Banks are concerned about the test’s growing focus on qualitative issues, such as how they identify and mitigate risks.
The Fed says those evaluations are essential for changing the culture on Wall Street to be more wary of big risks, the report noted.
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