WASHINGTON— House Financial Services Committee Chairman Jeb Hensarling today commented on a Government Accountability Office (GAO) study he requested of the Federal Reserve’s annual stress testing of banks.  Chairman Hensarling requested the study in September 2014 to determine the costs, benefits, effectiveness and transparency of the Fed’s stress tests.

“The Dodd-Frank Act vastly increased the powers of the Fed way beyond its traditional monetary policy responsibilities.  Today, the Fed is part of a shadow regulatory system that is neither transparent nor accountable to the American people. The GAO 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.  When it comes to the Fed’s stress tests, not only are they not transparent, they are often duplicative and impose unnecessary costs and burdens on financial institutions that are ultimately passed on to consumers,” said Chairman Hensarling. “The Financial CHOICE Act – the Republican alternative to Dodd-Frank – includes reforms to make the Fed more accountable and to make its stress testing regime transparent.

“The changes recently proposed by the Federal Reserve to its stress testing process are inadequate given this report’s devastating findings and recommendations. This report demonstrates the absolute need for the new President to designate a Vice Chairman for Supervision at the Federal Reserve who will have the power to ‘oversee the supervision and regulation’ of financial firms supervised by the Federal Reserve,” Hensarling concluded.

GAO Report’s Notable Findings:

• The Federal Reserve has not always followed its own guidance or principles.
  
  
• The Federal Reserve has not explicitly analyzed how to balance scenario severity choices’ influence on banking system resiliency with potential economic effects. Without more careful assessment of the trade-offs associated with scenario severity, the Federal Reserve cannot be reasonably assured that the scenario design process balances any improvements in the resiliency of the banking system with any impact on the cost and availability of credit.
  
  
• Although it uses a decision-making framework to assess qualitative CCAR submissions, the Federal Reserve has not publicly disclosed information that would allow for a better understanding of its assessment methodology or the reasons for objection determinations. Transparency is a key feature of accountability and this limited disclosure may hinder understanding of the CCAR program and limit public and market confidence in the program and the extent to which the Federal Reserve can be held accountable for its decisions. The Federal Reserve also has not regularly updated guidance to firms about supervisory expectations and peer practices related to the qualitative assessment.
  
  
• The Federal Reserve has not communicated time frames for responding to questions it receives through the CCAR communications mailbox, which could hinder companies’ management and planning of their CCAR submissions and limit their ability to address supervisory concerns in a timely fashion.
  
  
• The Federal Reserve has not assessed whether or how changes to the supervisory scenarios could inadvertently amplify economic cycles (procyclicality) - which its scenario design policy aims to avoid - until after it has finalized the scenarios. Without additional analysis prior to completing and publishing its scenarios, the Federal Reserve cannot be reasonably assured that small adjustments to the scenario variables would produce outcomes that neither amplify nor dampen economic cycles.