United States Federal Reserves May Include Bitcoin Market Crash As Part Of The Salient Risk For Stress Tests

According to a a report by the Federal Registry that was released on Thursday, the United States Federal Reserve may add the Bitcoin market collapse to its list of ‘salient risks’ that will be taking into account during stress tests. The stress test is a yearly supervisory program that provides a general framework that certain companies will use as a guide to carry out their internal stress test. This has been a mandatory move that was put into effect in the year 2010. The Dodd-Frank Act was created as a response to the 2008 economic meltdown.

United States Federal Reserve Mandatory Stress Test

The tests are used to establish three possible situations. One is the baseline, the second is adverse while the third is severely adverse. This is followed by a projection of a company’s balance sheet, net income, risk-weighted assets, capital levels along with the possible regulatory capital ratios and post-stress capital levels.

The Board of Governors are trying to make sure that the stress tests are sufficiently dynamic, the Fed may add scenarios that make up for salient risks. These include considering extraordinary shocks like the collapse of the Bitcoin market, losses that may be suffered by traders due to misconduct and a possible war with North Korea.

These aren’t the only amendments that were proposed. However, if they are accepted, they will be part of the upcoming stress tests scheduled for April 1st. Part of the report from the board stated:

“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.”

Financial Stability Board Talks About Evolving Assets

Randal K. Quarles, the Fed’s vice chairman and governor for supervision stated that cryptocurrencies have become standalone asset class and it has achieved significant growth. Quarles, who is also the chair of the Financial Stability Board, said that cryptocurrencies pose a threat to any existing framework. He added that the FSB has decided to review vulnerabilities accessing framework to make sure that they are up to date regarding the assessment of financial stability.

Bitcoin (BTC) Price Today – BTC / USD

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He made this remark during the special governors Bank of International Settlements meeting that took place in Hong Kong. Quarles acknowledged that its not going to be easy for the FSB to develop a framework that will account for the evolving financial systems. There were mixed reactions after the meeting was concluded. This is because in October, the FSB said that cryptocurrencies do not pose any risk to the stability of the global financial economy.

Formed in 1913, the United States Federal Reserve System is a central banking system that was launched with the enactment of the Federal Reserve Act. The Fed is meant to alleviate financial crisis and one way it does this is through the mandatory stress tests.

The Financial Stability Board is made up of financial institutions including regulators and central banks. The body issues recommendations for regulatory control.

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