Barr Delivers Remarks at Hearing to Examine Bank Stress Testing
Washington,
June 26, 2024 -
Today, the House Financial Services Subcommittee on Financial Institutions and Monetary Policy, led by Chairman Andy Barr (KY-06), is holding a hearing entitled “Stress Testing: What’s Inside the Black Box?”
Watch Chairman Barr’s opening remarks here.
Read Chairman Barr’s opening remarks as prepared for delivery:
“When done right, stress testing can be beneficial to banks, consumers, and the financial system.
“Stress tests demonstrate to everyone that the U.S.’s largest banks are well capitalized, resilient, and capable of functioning—and lending—throughout the economic cycle.
“But, for all these benefits to flow from stress tests, the tests must be credible, with transparency and accountability.
“Instead of running stress tests in an open and accountable manner, subject to public scrutiny, the Federal Reserve cloaks the stress tests under a veil of secrecy.
“This is no legal basis for this secrecy, and the perceived benefits of secrecy are illusory at best.
“No one disputes that the stress tests are used in binding capital requirements, including the stress capital buffer, and can be used to restrict banks from paying dividends.
“The stress tests, including the scenarios and models, must be subject to the notice and comment rulemaking process.
“I’m certain that we’ll hear from our colleagues on the other side of the aisle that key aspects of the stress test must remain secret and not subject to public comment. We’ll probably hear that banks will simply ‘game the tests’ and that there’s not enough time to take public comment on the stress test scenarios.
“Even if these arguments were legally tenable, which they are not, they still don’t carry water.
“As we’ll hear from our witnesses, it’s not clear that the banks could easily game the stress tests, even if they wanted to, and the Fed already has plenty of traditional supervisory tools to address ‘gaming.’
“More importantly, if disclosing models resulted in better stress performance without improved risk profiles, this suggests that there are material weaknesses in the models themselves, rather than a problem with public disclosure.
“It’s critical that the Fed gets stress testing right.
“And with growing politicization of the Federal banking agencies, it is possible that rogue officials pursuing political agendas could also game the tests by manipulating models and assumptions to obtain desired results for heightened capital requirements or reduced dividends.
“The stress tests have real world impacts:
“Banks make capital allocations based on how they think they will perform on stress tests. This means that banks are making decisions about to how to lend based in part on how they think the Fed’s models will work.
“And because banks are only making guesses, they must be more conservative with how they allocate their capital to ensure they can easily pass the stress tests, regardless of the underlying models and assumptions used.
“This has a real-world impact on the families, farmers, and small businesses who rely on banks to access credit.
“Moreover, the stress tests impact how much dividends banks can pay. It’s important that banks can return their profits to shareholders, as otherwise investors will not choose to invest in banks in the future.
“This hearing builds on the work that our Committee has been doing this Congress to improve the stress testing regime.
“This Committee recently reported out my bill, the Bank Resilience and Regulatory Improvement Act, which would require that the Fed disclose the underlying models and assumptions used in the stress tests and require that the Fed take public comment on each year’s stress testing scenarios.
“Of course, there’s nothing keeping the Fed from fixing these problems on their own, but due to their continued unwillingness to do so, I applaud my colleagues for advancing this important piece of legislation.
“I look forward to our witnesses shedding at least a glimmer of light on these opaque processes.”
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