CONTACT: Brigid Richelieu
(202) 660-2569
ICYMI: Transparency in Stress Testing “Essential to Achieving a More Effective, Efficient and Resilient Financial System.”
There is no compelling public policy rationale to maintain a largely opaque approach to stress testing, Forum chief economist tells lawmakers.
Washington, D.C. – Financial Services Forum chief economist Dr. Sean Campbell testified yesterday before the House Financial Institutions and Monetary Policy Subcommittee on the need for greater transparency in the stress testing process. In his testimony, Campbell emphasized that the lack of transparency in the stress testing regime is incongruous with the rest of the large bank capital regime and creates a clear and troubling disconnect in the government’s approach to transparency in bank capital regulation.
“Aligning stress tests with the public process afforded other bank regulatory standards would help improve public trust, promote economic stability, and ensure banks can support the economy to their fullest potential,” Campbell told lawmakers.
Following are highlights from the hearing:
On Opacity in Stress Testing
“As is the case for all other risk-based capital requirements, banks need to understand the regulatory rules to which they are subject to make informed decisions,” Campbell said. “Stress testing opacity forces banks to make decisions based on incomplete data and information that hinder banks’ core function of stewarding financial resources to their most productive and efficient use.”
On How Increased Transparency Won’t Enable Banks to Game the System
“This notion of gaming the stress test is largely a misnomer,” Campbell said. “What banks are doing is they’re using the information that they have access to in the risk weights in the context of things like the GSIB capital surcharge, and in principle, in the context of the stress test, to assess the riskiness of the assets on their balance sheet, and then make funding decisions on a relative basis in concert with the other information that they bring to the table in the context of their own risk-management decisions. And the better information that they have access to, the more complete that information, the better risk management decision that they can make.”
On the Benefits of Increased Transparency:
“Greater transparency on the implementation and the specification of the stress test models themselves, as well as greater transparency on the scenario generation process, would help to foster greater understanding amongst banks, amongst the public, and amongst regulators,” Campbell told lawmakers.
For more information on stress testing, please review the Forum’s fact sheet and other related content.
###
The Financial Services Forum is an economic policy and advocacy organization whose members are the chief executive officers of the eight largest and most diversified financial institutions headquartered in the United States. Forum member institutions are a leading source of lending and investment in the United States and serve millions of consumers, businesses, investors, and communities throughout the country. The Forum promotes policies that support savings and investment, financial inclusion, deep and liquid capital markets, a competitive global marketplace, and a sound financial system.
Visit our website: fsforum.com