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, the American Bankers Association in a white paper today 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. For example, the supervisory models and scenarios for the Comprehensive Capital Adequacy Review (which applies to banks with more than $50 billion in assets) are developed and issued without review or comment by the public, leaving bankers to “manage, price, and allocate capital without a fully informed view of key regulatory drivers and expectations.” This, in turn, can harm borrowers, ABA pointed out.

“Any higher capital requirements encourage banks to shift lending away from asset classes disfavored by the test and its scenarios, impacting credit availability for certain types of borrowers,” ABA said the paper to the Treasury Department. “[T]hese are real world consequences based upon hypothetical regulatory predictions of the future, not based upon actual bank or borrower performance.”

To improve the stress testing 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. For more information, contact ABA’s Wayne Abernathy.