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Wall Street Journal / Biz - Money

Fed Plans to Disclose More About Big-Bank Stress Tests

The Federal Reserve proposed disclosing more about its big-bank stress tests, in response to criticism from bankers who have said the exams’ results are hard to understand.
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Ryan Tracy

WASHINGTON—The Federal Reserve on Thursday proposed disclosing more about its big-bank stress tests, in response to criticism from bankers who have said the exams’ results are hard to understand.

The proposal, if adopted, would have the Fed publish how different loan portfolios perform under the statistical models it uses to calculate whether banks can survive a hypothetical recession. The loan data would be published each year before the tests are run.

The proposal stops short of fully disclosing the Fed’s statistical models, a move that some Fed officials believe would allow banks to game the exams.

“This enhanced transparency will bolster the credibility of our stress tests and help the public better evaluate the results,” Fed Vice Chairman for Supervision Randal Quarles said in a statement. “The proposed changes will also generate valuable insight from stakeholders and we look forward to it.”

Fed Chairwoman Janet Yellen and Fed governor Jerome Powell, who has been nominated to succeed Ms. Yellen, were part of a unanimous vote in favor of the proposal.

The new loan disclosures show the characteristics of three sets of 200 loans: a higher-risk portfolio, a lower-risk portfolio and an average one. The Fed also disclosed the loss rates that its models calculated for those loan portfolios based on the 2016 stress-test scenario.

The proposal is the latest in a series of changes to the annual tests, which have become the centerpiece of the Fed’s oversight of large U.S. banks. The exams are key for bank investors, since failing them can prevent a bank from boosting dividends or share buybacks.

The Fed has already made the tests easier to pass for banks with less than $250 billion in assets, and has said it would consider similar changes for the largest U.S. banks.

Congress is also considering legislation that could lead the Fed to exempt some regional banks from the annual tests entirely.

Mr. Quarles, in recent public remarks, said he believes the Fed should be disclosing significantly more about the exams.

In addition to disclosing more about loan losses under its statistical models, the Fed proposed releasing “more detailed descriptions of the...models, such as certain equations and key variables.” It also proposed changes to the process for developing the scenarios used in the tests.

Write to Ryan Tracy at ryan.tracy@wsj.com

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