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Are the Federal Reserve's Stress Test Results Predictable?

Author

Listed:
  • Paul Glasserman

    () (Office of Financial Research)

  • Gowtham Tangirala

    () (Columbia University)

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.

Suggested Citation

  • Paul Glasserman & Gowtham Tangirala, 2015. "Are the Federal Reserve's Stress Test Results Predictable?," Working Papers 15-02, Office of Financial Research, US Department of the Treasury.
  • Handle: RePEc:ofr:wpaper:15-02
    as

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    File URL: https://financialresearch.gov/working-papers/files/OFRwp-2015-02-Are-the-Federal-Reserves-Stress-Test-Results-Predictable.pdf
    File Function: First version, 2015
    Download Restriction: no

    References listed on IDEAS

    as
    1. Til Schuermann & Beverly Hirtle & Kevin J. Stiroh, 2009. "Macroprudential supervision of financial institutions: lessons from the SCAP," Staff Reports 409, Federal Reserve Bank of New York.
    2. Covas, Francisco B. & Rump, Ben & ZakrajŇ°ek, Egon, 2014. "Stress-testing US bank holding companies: A dynamic panel quantile regression approach," International Journal of Forecasting, Elsevier, vol. 30(3), pages 691-713.
    3. Acharya, Viral & Engle, Robert & Pierret, Diane, 2014. "Testing macroprudential stress tests: The risk of regulatory risk weights," Journal of Monetary Economics, Elsevier, vol. 65(C), pages 36-53.
    4. Pavel Kapinos & Oscar A. Mitnik, 2016. "A Top-down Approach to Stress-testing Banks," Journal of Financial Services Research, Springer;Western Finance Association, vol. 49(2), pages 229-264, June.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Flannery, Mark & Hirtle, Beverly & Kovner, Anna, 2017. "Evaluating the information in the federal reserve stress tests," Journal of Financial Intermediation, Elsevier, vol. 29(C), pages 1-18.
    2. Marcelo Fernandes & Deniz Igan & Marcelo Pinheiro, 2015. "March Madness in Wall Street: (What) Does the Market Learn from Stress Tests?," Working Papers 771, Queen Mary University of London, School of Economics and Finance.
    3. Lukas Ahnert & Pascal Vogt & Volker Vonhoff & Florian Weigert, 2018. "The Impact of Regulatory Stress Testing on Bank's Equity and CDS Performance," Working Papers on Finance 1814, University of St. Gallen, School of Finance.
    4. Christoph Aymanns & J. Doyne Farmer & Alissa M. Keinniejenhuis & Thom Wetzer, 2017. "Models of Financial Stability and their Application in Stress Tests," Working Papers on Finance 1805, University of St. Gallen, School of Finance.
    5. International Monetary Fund, 2015. "United States; Financial Sector Assessment Program-Stress Testing-Technical Notes," IMF Staff Country Reports 15/173, International Monetary Fund.
    6. Buch, Claudia M. & Vogel, Edgar & Weigert, Benjamin, 2018. "Evaluating macroprudential policies," ESRB Working Paper Series 76, European Systemic Risk Board.

    More about this item

    Keywords

    Stress Testing;

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