Federal regulators’ stress tests for banks are not transparent enough, the Government Accountability Office said Tuesday in a new report that validates part of banks’ complaints about the annual tests.
“Transparency is a key feature of accountability and such incomplete disclosure may limit understanding of the [stress test results] and hinder public and market confidence,” the report concluded.
It also faulted the regulators’ modeling of the stress tests, and warned that they might miss the possibility of some unusual or extreme crises, and for the possibility that their models might be missing systemic risks.
The office recommended 15 changes for the stress tests, including, significantly, that the regulators provide more specific and clearer explanations to failed banks of why they failed. Without insight into why they failed or how they could have passed, banks have a harder time passing, the report noted.
The stress tests are annual exercises in which regulators run banks’ balance sheets through hypothetical financial crises to see whether the banks would survive with sufficient capital. The stress tests, which are highly anticipated and require enormous resources and attentions from the banks, have become a key part of the post-crisis financial architecture. Investors pay close attention to the results because regulators can stop banks from paying out dividends or buying back shares if they fail the stress test.
Tuesday’s report was requested by House Financial Services chairman Jeb Hensarling, a Republican. Republicans have questioned regulators about whether the stress tests place arbitrary demands on banks, a major industry concern.
In a statement Tuesday, Hensarling said that the report “confirms the secrecy surrounding the stress tests makes it almost impossible to measure the effectiveness of the Fed’s regulatory oversight or the integrity of the tests’ findings.”
The Federal Reserve responded that it has been and will continue to work on making the test results more transparent.
In the past, however, Fed officials have said that it might be advantageous to keep banks guessing in planning for the stress tests, to encourage them to focus on actually making their banks safer rather than preparing for the specific requirements of the tests.
