Banks' Backtesting Exceptions during the COVID-19 Crash: Causes and Consequences
Aaron L. Game,
Diana A. Iercosan,
Hulusi Inanoglu and
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Diana A. Iercosan: https://www.federalreserve.gov/econres/diana-a-iercosan.htm
Hulusi Inanoglu: https://www.federalreserve.gov/econres/hulusi-inanoglu.htm
David Lynch: https://www.federalreserve.gov/econres/david-k-lynch.htm
No 2021-07-08-2, FEDS Notes from Board of Governors of the Federal Reserve System (U.S.)
Banks' numerous and simultaneous backtesting exceptions in March 2020, during the COVID-19-related market crash, would have amplified their already-large spike in market risk capital requirements in the absence of regulatory intervention. This note provides background on how backtesting exceptions affect capital requirements generally, the source of those exceptions during the COVID-19 crash, and how regulators exercised discretion to mitigate the unintended capital increase.
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