In credit risk management, it is common to distinguish between point-in-time (PIT) and through-the-cycle (TTC) estimates of default probability or expected loss. But amid a unique pandemic, TTC loss forecasts may have been too bullish, and there is now talk about whether this credit risk estimation tool needs to be fine-tuned to reflect financial institutions’ new reality.
Stress testing, up until now, has basically been a theoretical exercise. Growth has been slow but steady and the imbalances that can trigger recessions have largely been absent. However, with many now calling for a 2020 U.S. recession – and with Brexit looming – we may soon find out whether stress tests actually work when applied in the real world.
In recent weeks, public debate in the banking industry has centered on loosening stress testing rules for the largest banks. Democrats in Congress have discussed the prospect of removing the burden of Comprehensive Capital Analysis and Review (CCAR) for all banks with assets under $250 billion. Treasury Secretary Steven Mnuchin has gone further, suggesting that banks with assets between $10 billion and $50 billion be freed from all regulatory stress test scrutiny.