The top Democrats on the House and Senate banking committees are accusing the Federal Reserve of dismantling the stress test framework by seeking to make the process more transparent.
The Fed under Vice Chair for Supervision Michelle Bowman has advanced proposals to require it to annually disclose stress test model documentation and scenarios, as well as seek public comment on any material changes to the models. In a joint letter to Bowman, House Financial Services Committee Ranking Member Maxine Waters (D-Calif.) and Senate Banking Committee Ranking Member Elizabeth Warren (D-Mass.) accused the Fed of weakening the effectiveness of the tests to fulfill “Wall Street’s wish list.”
“The Fed has stated that one purpose of its recent stress testing proposals is to reduce volatility and improve predictability for big banks,” the lawmakers said. “This notion ignores that volatility and unpredictability are key features of stress testing, ensuring that firms manage their risks conservatively to account for tail risks that are by definition unexpected. Big banks will never have certainty and predictability regarding real-world financial shocks.”
They also criticized the move to subject stress tests to public review.
“A lengthy notice and comment process will reduce the dynamism needed for rigorous and reliable stress tests,” the lawmakers said. “Moreover, it invites the banking industry to object to models or scenarios they expect will lead to higher projected losses and required capital.”
Earlier this year, the American Bankers Association joined other associations in calling the Fed’s proposed changes an encouraging step toward transparency. They also recommended further changes to help the Fed more fully realize its goal of a more objective process that aligns capital charges with risk.
