Federal banking associations call for increased transparency in the Fed's stress testing procedures
Federal Reserve Faces Calls for Transparency in Stress Testing Process
A petition, submitted this week by the Bank Policy Institute (BPI) and the American Bankers Association, is urging the Federal Reserve to reconsider its approach to determining stress capital buffer requirements. The petition asks the Federal Reserve to initiate a rulemaking process, seek public comments, and disclose the details of the annual scenarios used in its stress tests.
The call for transparency comes nearly a month after the Fed 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, with the largest banks weathering a hypothetical stress test scenario with $541 billion in projected losses.
Greg Baer, CEO of the BPI, has stated 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. He compared the secrecy of the Federal Reserve's stress testing program to the IRS sending out tax bills based on a published code, not a secret model.
Bank trade groups have criticized the stress testing procedure in recent years, arguing that the central bank has frequently increased capital requirements. The petition claims that the Fed has 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 petitioners have asked the Fed to make public all models, formulas, and methodologies used to decide the examination course. They argue that the proposed rule changes, which would increase the amount of capital banks with more than $100 billion in assets would be forced to hold, will add to the murkiness of the stress test's inner workings.
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 BPI CEO also compared the inconsistency of the Federal Reserve's stress testing program to speed limits that are posted and consistent, not hidden or constantly varying in erratic ways. He stated that granting the requests would remedy the serious existing legal defects that currently undermine the credibility and effectiveness of the Board's framework for setting stress-based capital requirements.
However, it is worth noting that no search results specify which organizations, other than the BPI and American Bankers Association, have petitioned the Federal Reserve Board of Governors to review the procedures for determining the annual stress capital requirement scenarios and to gather public opinions.
The petition notes that granting the requests would point to the complex and challenging nature of the task that could benefit from public review and a range of external perspectives. As the debate continues, it remains to be seen how the Federal Reserve will respond to these calls for transparency.
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