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Fed Makes It Easier For Banks To Pass Stress Tests (#GotBitcoin?)

The Fed recently made it easier for banks to pass the stress tests, easing a “qualitative” component of the exam that evaluates banks on factors such as the quality of its internal data and management controls. Fed Makes It Easier For Banks To Pass Stress Tests (#GotBitcoin?)

The Fed is also considering changes that would eliminate the chance banks could fail the second part of the test—which evaluates whether the banks would have enough capital under a hypothetical shock to remain above all regulatory capital requirements—in favor of a continuous capital requirement.

Those changes have sparked concerns from some Democrats, who say the Fed is making the exercise too easy for banks. For the second time ever this year, no firm failed the stress tests.

Annual exam must explore unexpected scenarios or it might fail to prepare financial system for next downturn.

Federal Reserve Chairman Jerome Powell said stress tests of the nation’s largest banks must adapt and keep firms on their toes, or the annual exam could fail to prepare the financial system for the next downturn.

“If the stress tests do not evolve, they risk becoming a compliance exercise, breeding complacency from both supervisors and banks,” Mr. Powell said Tuesday in prepared remarks for a stress-testing conference at the Federal Reserve Bank of Boston.

“When the next episode of financial instability presents itself, it may do so in a messy and unexpected way,” Mr. Powell added. “Banks will need to be ready not just for expected risks, but for unexpected ones.”

The tests must vary from year to year and explore “even quite unlikely scenarios,” Mr. Powell said, warning that too rote an exam could encourage banks to have similar portfolios, making the system more vulnerable to specific risks.

“All banks would look much alike rather than the banking system we want and need, one with diverse institutions with different business models,” he said.

 

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