In this staff report, the Committee on Capital Markets Regulations (the “Committee”) examines how certain aspects of the Federal Reserve’s bank stress testing regime have adverse impacts on underserved borrowers.

 

First, we review the Fed’s approach to its balance sheet assumptions in its stress test, summarizing the methodology through which the Fed projects loan balances. We then document the inconsistencies between the Fed’s assumptions and historical bank behavior during periods of economic stress. Next, we explain how these flawed stress test projections can distort capital allocation such that it does not reflect the underlying risk of the loans it is intended to support and negatively impacts underserved borrowers.

 

We conclude with a recommendation for revising Fed stress test assumptions that would better reflect reality across loan categories, and likely enhance underserved borrowers’ access to credit.

 

The full report is available here.