ABA Op-Ed Calls for Re-Examination of Stress Test Requirements

In an American Banker op-ed today, ABA VP Hugh Carney and senior counsel Shaun Kern called on Congress to reconsider the arbitrary asset thresholds at which banks are subject to Dodd-Frank Act stress testing requirements.

While they acknowledged that stress tests can “provide valuable insight into the strength and resilience of the financial system,” they questioned the usefulness of the tests for banks that do not pose systemic risk. For instance, midsize banks — which have modest financial and geographic footprints — are subject to stress tests under macroeconomic scenarios that have little or no relevance to them.

Carney and Kern pointed out that Dodd-Frank arbitrary asset thresholds of $10 billion, $50 billion and $250 billion “crudely divide the industry in a manner that is unrelated to actual risk, and needlessly tie the hands of agencies seeking to strike an appropriate regulatory balance.” They noted that several regulators recently have made similar statements acknowledging the shortcomings of the stress testing regime, and have issued a proposal to simplify the regulatory capital framework. But without congressional action, banks will be forced to continue diverting resources into burdensome stress tests that could otherwise be used to serve customers, they added.

“The time is right for policymakers to engage in a comprehensive review of the timing, transparency and effectiveness of stress testing. Post-crisis hastiness to regulate now and ask questions later on this issue has produced years of effort and data that are of little use to banks or regulators.”