The U.S. Federal Reserve (the Fed) is considering adding the bitcoin market crash as one of the “extraordinary events” and risks that its researchers need to look at when conducting its customary stress tests of the U.S. financial markets,
A new amendment by the Fed’s board suggests changes to its policy, with the feeling that research needs to go beyond an analysis of historical data to consideration about “salient” market risks.
As well as events like war with the likes of North Korea, and other major market losses, the policy statement recommends a look into what a potential collapse in the bitcoin markets portends for the financial well-being of the U.S. economy.
According to the board, the idea is to introduce sufficient “dynamism” to the supervisory stress tests. That means that “where appropriate, the Board intends to continue augmenting the scenarios with risks it considers to be salient.”
The Fed’s supervisory stress tests that occur annually provide the framework for which eligible companies conduct internal stress tests pursuant to the Dodd-Frank Wall Street Reform Act (which came into effect in 2010), and the Board’s rules on stress tests.
Notably, bitcoin and the Dodd-Frank Act were both direct responses to the financial crash of 2008.
If the proposed amendments are adopted, then they’d become part of the Fed Board’s stress test policy and begin being applied effective April 1, 2019.
Outlining the functions and reasons for the policy and tests, the Board notes that:
“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.”
For the tests in question, the Board of Governors presents three stress-test scenarios, in what it categorizes as “baseline,” “adverse” and “severely adverse.”
These scenarios project a particular company’s balance sheet, net income, risk-weighted assets (RWA), and post-stress capital levels among other such factors. Again, all these are considered under each one of the stress-test scenarios.
The amendments include proposals to add changes in unemployment rates of 4 percent or lower under given economic conditions. It would also consider recommendations on “guidance for the path of the nominal house price index” with both changes put under the third category of “severely adverse” scenarios.
The Fed Board’s amendments come after recent comments by the Financial Stability Board (FSB) chair and vice chair at the Federal Board of Governors Randal K. Quarles. Quarles stated last month that the emergence and growth of crypto as an asset class could “challenge any framework.”
However, he noted that this challenge is what makes the FSB review of its vulnerability assessment framework “all the more important.”
Disclaimer: This is not investment advice. Cryptocurrencies are highly volatile assets and are very risky investments. Do your research and consult an investment professional before investing. Never invest more than you can afford to lose. Never borrow money to invest in cryptocurrencies.