Are the Fed's Stress Test Results Predictable?

20 Pages Posted: 18 Feb 2015

See all articles by Paul Glasserman

Paul Glasserman

Columbia Business School

Gowtham Tangirala

Columbia Business School

Date Written: January 5, 2015

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. We discuss potential implications of these patterns for the further development and application of stress testing.

Keywords: Bank capital, regulation, stress testing

JEL Classification: G21,G20,G18

Suggested Citation

Glasserman, Paul and Tangirala, Gowtham, Are the Fed's Stress Test Results Predictable? (January 5, 2015). Columbia Business School Research Paper No. 15-23. Available at SSRN: https://ssrn.com/abstract=2565798 or http://dx.doi.org/10.2139/ssrn.2565798

Paul Glasserman (Contact Author)

Columbia Business School ( email )

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212-854-4102 (Phone)
212-316-9180 (Fax)

Gowtham Tangirala

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

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