OFR Issues Incorporating Liquidity Shocks and Feedbacks in Bank Stress Tests Brief

The Office of Financial Research ("OFR") issued a brief concerning how "different shocks can result in banks engaging in transactions to maintain compliance with regulatory ratios and what the potential implications of such transactions could be on other banks through delegating."The potential shocks on bank regulatory ratios addressed in the OFR brief included credit, funding, liquidity, and collateral shocks. The OFR recommended to U.S. banking supervisors to improve supervisory stress tests by: (i) heightening prudential standards to strengthen the ability of the banking system to withstand shocks; (ii) carefully considering second-round effects and the impact of the types regulatory ratio breaches to further understand how shocks are spread; (iii) including a liquidity shock scenario and the net stable funding ratio.

See: OFR Brief: "Incorporating Liquidity Shocks and Feedbacks in Bank Stress Tests".