Are BHCs Mimicking the Fed's Stress Test Results?
Beverly Hirtle and
No 20150921, Liberty Street Economics from Federal Reserve Bank of New York
In March, the Federal Reserve and thirty-one large bank holding companies (BHCs) disclosed their annual Dodd-Frank Act stress test (DFAST) results. This is the third year in which both the BHCs and the Fed have published their projections. In a previous post, we looked at whether the Fed’s and the BHCs’ stress test results are converging in the aggregate and found mixed results. In this post, we look at stress test projections made by individual BHCs. If the Fed’s projections are very different from a BHC’s in one year, do the BHC projections change in the following year to close this gap? Or are year-to-year changes in BHC stress test projections driven more by changes in underlying risk factors? Evidence of BHCs mimicking the Fed would be problematic if it meant that the BHCs are not really independently modelling their own risks. Convergence poses a potential risk to the financial system, since a financial system with monoculture in risk measurement models could be less stable than one in which firms use diverse models that collectively might be more likely to identify emerging risks.
Keywords: stress tests; bank capital (search for similar items in EconPapers)
JEL-codes: G2 (search for similar items in EconPapers)
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