Federal banking associations push for increased transparency in Federal Reserve's stress test evaluations
The Bank Policy Institute (BPI) and the American Bankers Association (ABA) have submitted a petition to the Federal Reserve, calling for greater transparency in the stress testing procedures used to determine capital requirements for large banks.
According to ABA CEO Rob Nichols, the stress test program remains unnecessarily opaque. He argues that the choices the Federal Reserve makes in its models and scenario assumptions can directly affect credit availability and have a meaningful impact on economic growth and job creation. BPI CEO Greg Baer echoed these sentiments, stating that there is no legal justification for the Federal Reserve to continue to calculate large bank capital requirements with rules that are developed and applied in secret.
The petition requests the Federal Reserve to make public all models, formulas, and methodologies used to decide the examination course. It claims that the Federal Reserve violated the Administrative Procedure Act by not revealing the details of the models and formulas used in the test and all the scenarios used in the stress test exercises.
The petition comes nearly a month after the Federal Reserve released its annual stress test results, which demonstrated that large banks are well-positioned to lend to households and businesses even during a severe recession. The Fed's annual stress test results showed that the largest banks weathered a hypothetical stress test scenario with $541 billion in projected losses.
The proposed rule changes are meant to bring U.S. regulations in line with the 2017 Basel III agreement. The Federal Reserve, along with the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency, has proposed a revamp of capital requirements. The proposed rule changes would increase the amount banks with more than $100 billion in assets would be forced to hold.
Bank trade groups have criticized the stress testing procedure in recent years, arguing that the central bank has frequently increased capital requirements. The organizations that submitted a proposal this week to the Federal Reserve to review the procedural rules for the annual scenarios and solicit public opinions to determine stress testing capital reserve requirements have not been specifically named in the provided search results.
The petition suggests that the complex and challenging nature of the task could benefit from public review and a range of external perspectives, rather than relying solely on the views of the Board, its staff, and its private advisors. Baer used the example of speed limits, stating that they are posted and consistent, not hidden or constantly varying in erratic ways. He also compared the IRS, which sends out tax bills based on a published code, not a secret model, to the Federal Reserve.
No other agency of government operates in the way the Federal Reserve does, according to Baer. The petition asks the Federal Reserve to consider a rulemaking process and seek public comments on its annual scenarios used to determine stress capital buffer requirements. If accepted, this would mark a significant shift in the way the Federal Reserve conducts its stress tests, moving towards greater transparency and accountability.
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