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Banks' Backtesting Exceptions during the COVID-19 Crash: Causes and Consequences

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Abstract

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.

Suggested Citation

  • Alice Abboud & Christopher Anderson & Aaron L. Game & Diana A. Iercosan & Hulusi Inanoglu & David Lynch, 2021. "Banks' Backtesting Exceptions during the COVID-19 Crash: Causes and Consequences," FEDS Notes 2021-07-08-2, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfn:2021-07-08-2
    DOI: 10.17016/2380-7172.2939
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    File URL: https://www.federalreserve.gov/econres/notes/feds-notes/banks-backtesting-exceptions-during-the-covid-19-crash-causes-and-consequences-20210708.htm
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    File URL: https://libkey.io/10.17016/2380-7172.2939?utm_source=ideas
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    Cited by:

    1. Darrell Duffie & Michael J. Fleming & Frank M. Keane & Claire Nelson & Or Shachar & Peter Van Tassel, 2023. "Dealer Capacity and U.S. Treasury Market Functionality," Staff Reports 1070, Federal Reserve Bank of New York.
    2. Duncan, Elizabeth & Horvath, Akos & Iercosan, Diana & Loudis, Bert & Maddrey, Alice & Martinez, Francis & Mooney, Timothy & Ranish, Ben & Wang, Ke & Warusawitharana, Missaka & Wix, Carlo, 2022. "COVID-19 as a stress test: Assessing the bank regulatory framework," Journal of Financial Stability, Elsevier, vol. 61(C).

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