ABA, BPI seek transparency around Fed stress tests

The American Bankers Association and the Bank Policy Institute on Monday petitioned the Federal Reserve to open for public comment both the supervisory models and stress scenarios that the agency uses to calculate binding capital requirements through its annual stress tests. In their request, the associations noted that the models and scenarios the Fed uses play a crucial role in setting minimum capital requirements for large banks and therefore have a direct effect on the economy. However, the agency has declined to seek comment on its stress scenarios and kept its supervisory models secret, both in violation of the Administrative Procedure Act, they said.

By granting the request, the Fed can remedy the serious existing legal defects that undermine the credibility and effectiveness of its framework for setting stress-based capital requirements, ABA and BPI said. Also, the move would acknowledge that the development of stress test models and scenarios is a complex and challenging task that could benefit from public review and a range of external perspectives, they added.

“The stress testing program remains unnecessarily opaque even though the high stakes for banks and the economy are crystal clear,” ABA President and CEO Rob Nichols said. “The choices the Federal Reserve makes in its models and scenario assumptions can directly affect credit availability and have a meaningful impact on economic growth and job creation. Given the implications, the Fed should welcome more public input and embrace greater transparency. These petitions advance both.”