The Federal Reserve Bank constantly adjusts risk criteria and adverse market scenarios – such as unemployment levels, in it’s guidance for bank stress test requirements. Notably, Bitcoin is mentioned as a possible salient risk. In other words, could a severe drop in the Bitcoin market capitalization adversely affect bank viability?
Since the advent of the Dodd-Frank Act, banks and other financial institutions have had to estimate (and report to the Fed) the potential impact of mild and severe economic recession-like scenarios on their financials, and in the event of failure, even write their own dissolution plan.
A great deal of time and expense have been poured into these areas, yet it can be a moving target.
In it’s recent report, Bitcoin is mentioned in the same terms as a war with another country, in this case – North Korea. (for the full report click here)
1. INCLUSION OF SALIENT RISKS IN SCENARIOS
Several commenters strongly supported the inclusion of salient market risks in the scenarios in general to make the supervisory stress test sufficiently dynamic. One commenter recommended that the Board incorporate events that are not in the historical record in scenarios, and that the Board allow the list of variables included in the scenarios to change. Similarly, a commenter expressed support for the incorporation in the stress test of shocks unlike those already experienced, since firms should be prepared to withstand events beyond those already endured. The commenter recommended that the Board consider extraordinary shocks, such as a war with North Korea, the collapse of the Bitcoin market, or major losses caused by trader misconduct, in its scenarios.
Torrey & Gray has helped banks staff roles in stress testing and we help companies recruit top accounting and finance talent in the growing cryptocurrency industry. Contact us today to find out how we can help you. Torrey & Gray is a top recruiting firm that places controllers and other positions in the Chicago and San Francisco markets.