US Board of Governors of the Federal Reserve System Notifies Firms of Enhancements to Federal Reserve Models Used to Estimate Operational Risk and Capital

The US Board of Governors of the Federal Reserve System sent a letter to firms participating in the upcoming Dodd-Frank Act Stress Test (DFAST) and Comprehensive Capital Analysis Review (CCAR) notifying them of certain enhancements to aspects of its operational risk and capital models. Among the enhancements to operational risk models are losses from expenses related to put‑back mortgages, as well as potential costs form unfavorable litigation outcomes. For DFAST 2016, the Federal Reserve Board notes that it will use historically-based loss projections (with two new modifications) using an average of two models, while dropping the loss distribution approach. Changes to capital models include incorporating greater precision in the adjustments to the regulatory capital ratio denominators, as well as modifying assumptions regarding the relationship between mortgage servicing assets and associated deferred tax liabilities.

View the letter.