Federal Reserve May Include the Recent Bitcoin Market Collapse as Part of Supervisory Stress Tests


The Bitcoin market has made a significant impact within the crypto industry. However, it appears that the difficulties that the market went through are significant enough for the United States Federal Reserve to take note. A potential amendment to a policy statement with the Federal Reserve indicates that the market has proven itself to be one of the “salient risks” that the government may take into account during supervisory stress tests.

These supervisory stress tests, which occur every year, offer the infrastructure for the companies covered under the policy to perform their own internal stress tests. The stress tests became mandatory after the 2008 financial crash, in accordance with the Dodd-Frank Wall Street Reform Act that was put into effect in 2010.

Three scenarios were established by the Board of Governors of the Federal Reserve System for the tests, which are “baseline, adverse, and severely adverse.” With the scenarios, the tests project a “firm's balance sheet, risk-weighted assets, net income, and resulting post-stress capital levels and regulatory capital ratios,” based on the weight of the situation.

The new policy statement indicates that the board wants to ensure that the tests are “sufficiently dynamic,” which is done by “augmenting the scenarios with risks it considers to be salient.” Elaborating on the need for the tests, the Board said,

“Together, the Dodd-Frank Act supervisory stress tests are intended to provide company management and boards of directors, the public, and supervisors with forward-looking information to help gauge the potential effect of stressful conditions on the ability of these large banking organizations to absorb losses, while meeting obligations to creditors and other counterparties and continuing to lend.”

The amendments in the policy are aimed to be put into effect on April 1st. In addition, there are changes in the unemployment rate considered, which is less than 4% in the “severely adverse” scenario. This scenario also includes a decline in the nominal house price index.

Randal K. Quarles, the new chair of the Financial Stability Board (FSB), made comments preceding the amendments that likely influenced the changes. Last month, Quarles commented,

“This will not be easy – developments like the emergence of crypto-assets may challenge any framework – but that makes the goal of a robust framework all the more important.”

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