Recommendations aim to capture SOFR-linked borrower behavior and funding cost dynamics in stress scenarios, enhancing resilience and preserving credit availability during market turbulence.
SOFR Academy has submitted a proposal to the Federal Reserve recommending refinements to the bank stress testing framework to reflect post-LIBOR market realities. The letter highlights research showing that, in a SOFR-only environment, loan and credit line drawdowns during market stress are likely to be higher than under LIBOR, potentially amplifying funding pressures on banks. The proposal suggests incorporating this dynamic—and related funding cost measures such as IOSCO-aligned credit spread indices—into supervisory models to improve the accuracy, realism, and effectiveness of stress tests, thereby strengthening financial stability.
This note is provided for informational purposes by SOFR Academy, Inc. (Sofr.org), a financial engineering firm that develops tools to support global financial market participants and public institutions. The firm’s products are designed to complement (near) risk-free rates and promote well-functioning credit markets. Headquartered in New York, SOFR Academy works with market participants, academics, and regulators to strengthen financial system resilience and transparency. SOFR Academy’s backers include 8VC, and former Goldman Sachs partner Robert Litterman who developed the Black–Litterman model together with Fischer Black in 1990. For more information, please visit www.SOFR.org.
This note is not designed to be taken as advice or a recommendation for any investment decision or strategy. Readers should make an independent assessment of relevant economic, legal, regulatory, tax, credit, and accounting considerations and determine, together with their own professionals and advisers, if the use of any index is appropriate to their goals. Neither the USD Across-the-Curve Credit Spread Index (AXI), nor the USD Financial Conditions Credit Spread Index (FXI) are associated with or sponsored by the Federal Reserve Bank of New York or any regulatory authority.
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