Are the Federal Reserve's Stress Test Results Predictable?

Paul Glasserman () and Gowtham Tangirala ()
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Paul Glasserman: Office of Financial Research
Gowtham Tangirala: Columbia University

No 15-02, Working Papers from Office of Financial Research, US Department of the Treasury

Abstract: Regulatory stress tests have become a key tool for setting bank capital levels. Publicly disclosed results for four rounds of stress tests suggest that as the stress testing process has evolved, its outcomes have become more predictable and therefore arguably less informative. In particular, projected stress losses in the 2013 and 2014 stress tests are nearly perfectly correlated for bank holding companies that participated in both rounds. We also compare projected losses across different scenarios used in the 2014 stress test and find surprisingly high correlations for outcomes grouped by bank or by loan category, which suggests an opportunity to get more information out of the stress tests through greater diversity in the scenarios used. We discuss potential implications of these patterns for the further development and application of stress testing.

Keywords: Stress; Testing (search for similar items in EconPapers)
Pages: 20 pages
Date: 2015-03-03
New Economics Papers: this item is included in nep-cba
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Citations: View citations in EconPapers (14)

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