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Tuesday, April 25, 2017

ABA Recommends Changes to Large, Midsize Bank Stress Tests

As part of the banking industry’s continuing response to President Trump’s executive order outlining “core principles” for financial regulation, ABA in a white paper urged federal regulators to make changes to the current stress testing framework for large and midsize banks.

While acknowledging that stress testing can be a powerful regulatory tool when properly designed and administered, ABA noted a lack of transparency within the current stress testing framework. To improve the process, ABA urged regulators to publish the CCAR supervisory model and scenarios prior to each testing cycle; remove the qualitative assessment component of stress testing for all banks; and ensure that the countercyclical GSIB surcharge does not become a procyclical requirement. Additionally, regulators should be more tailored with their assumptions, and recognize the economic and business realities banks would face under stress conditions, the association said.

ABA further recommended that regulators end the Dodd-Frank Act Stress Test requirements for midsize banks, and expressed support for a legislative change that would do so. Given that many midsize and regional banks have smaller geographic footprints than largest banks subjected to the test, ABA questioned the relevance of DFAST for these institutions, noting that the test pulls supervisory and management resources away from other forward-looking stress testing activities.

The white paper is the fourth of several that ABA will submit to Treasury in response to the executive order. It reflects feedback and input from numerous banks participating in ABA’s working groups over recent years.

Read the white paper.


Natalie Gratzen said...

The notion that an incredibly complex economy, embedded in a multinational global economy, can be managed using one throttle is incredibly naïve. As noted in the article, we have a one trick pony as a central bank, leading to interest rates at dangerously low levels such that the value of money has become (by definition) almost zero. That invites a measure of desperation in the investment world that suggests new projects can be undertaken with the expectation of almost zero money risk. In the past this has led to credit quality crises.
On the one hand, I as a papergrader of articles on related issues would say that conventional check-and-balances insulate governmental thinking is -ibe step removed from "controlling" the economy by means of delegating that task to the central bank. On the other hand, we need a more complete and integrated set of controls, to include integration of tax policy, and industrial policies if we wish to intelligently manage an economy far more complex than ever imagined. Try driving your car using simply the throttle.

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