Four days after the Fed proposed a rule to address the risk associated with excessive credit exposures of large banking organizations to a single counterparty, the Treasury's Office of Financial Research (OFR) published a study examining stress tests.

The government researchers found that when the Fed evaluates how banks would fare during a crisis, it may not be facing the indirect damage of a trading partner defaulted.

The Fed's annual stress tests ignore how the failure of a single big trading partner could affect all of the other entities a bank trades with. Those indirect exposures could have nine times the impact on a bank as the direct relationship with a failed party. Most big banks have concentrated exposures to just a few trading counterparts, the researchers found.

The Fed's annual assessments are "likely to significantly understate potential risk" from the hypothetical failure. Given a wider perspective, the tests "would inform supervisors and regulators of risk that may not be studied and may be greater than those which are commonly understood," they said.

"A [bank holding company] may be able to manage the failure of its largest counterparty when other BHCs do not concurrently realize losses from the same counterparty's failure. However, when a shared counterparty fails, banks may experience additional stress. The financial system is much more concentrated to (and firms' risk management is less prepared for) the failure of the system's largest counterparty. Thus, the impact of a material counterparty's failure could affect the core banking system in a manner that [Comprehensive Capital Analysis and Review] may not fully capture."