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Banking

Fed Creates Expert Council to Advise on Stress Tests

Federal Reserve Board buildingThe Federal Reserve Board on April 20 announced a series of steps it is taking to include outside expertise in the stress-testing process. The Dodd-Frank Wall Street Reform and Consumer Protection Act requires the Federal Reserve to conduct annual stress tests of the large bank holding companies and systemically important nonbanks that it supervises.

One such step is the formation of a Model Validation Council to advise the central bank on its efforts to assess the effectiveness of the stress-testing models it uses. The council, made up of academic economists, should "improve the quality of the Federal Reserve's models assessment program and strengthen confidence in the integrity and independence of the program," the Board said in a press release.

The 2012 council is chaired by Francis X. Diebold, an economics professor at the University of Pennsylvania. The other members include

  • Peter Christoffersen, of the University of Toronto
  • Mark Flannery, of the University of Florida
  • Philippe Jorion, of the University of California at Irvine
  • Chester Spatt, of Carnegie Mellon University
  • Allan Timmermann, of the University of California at San Diego

The Board also announced that it would host a two-day symposium on September 13 and 14 to discuss stress testing models. The event, to be held at the Boston Fed, will bring together experts from academia, the banking industry, and the Federal Reserve.

Additionally, the Board released an extensive list of frequently asked questions (FAQ) and responses about the recently completed Comprehensive Capital Analysis and Review. The FAQ includes information about the methodologies used to project losses for mortgages and other portfolios, mortgage repurchase risk, and wholesale portfolios.

April 27, 2012