How banks game stress tests: the ‘shocking’ truth

Leaked memo exposes effort to swap out risky assets despite Fed’s push to end “window dressing”

Risk 1019 Lead story Stephen Lee NB illustration
School of (not so) hard shocks: banks stand accused of manipulating the market shock scenario
Stephen Lee, nbillustration.co.uk

It seemed innocuous enough. A large US bank approaches a European dealer proposing to swap equities for bonds on a triparty basis, in an arrangement it describes as an “upgrade trade”.

Later discussions, detailed in a memo dated May 2018, show the underlying purpose of the trade: to help the US bank with “liquidity needs during stress test periods”. In other words, the bank wanted to massage its trading book in the lead-up to the US Federal Reserve’s annual stress test by temporarily offloading

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