00:00 Josh
The Federal Reserve put forth a proposal that updates its stress test process for the nation’s largest banks. Yahoo Finance’s Jennifer Schonberger is joining us now with more. Jen.
00:08 Jennifer Schonberger
Hey there, Josh.
00:10 Jennifer Schonberger
That’s right, the Fed putting forth a new proposal to disclose in detail the models and methodologies that the central bank uses to stress test the nation’s largest banks in an effort to increase transparency. Right now though, stress test models, how the models are designed and specific scenarios are not fully disclosed, nor are they open for public comment. And Vice Chair of Supervision Michelle Bowman contends that the lack of transparency can lead to uncertainty for banks and capital planning and potentially misalign capital requirements with actual risks. Now, today’s proposal would instead disclose in full detail the stress tests and how they are designed with the option to offer input every year. Now, the stress tests were mandated annually by law after the 2008 financial crisis for banks with $100 billion or more in total assets. and they examine whether banks could continue lending to households and businesses during a hypothetical severe recession to prevent bank failures during a crisis. And the Fed uses the results from those stress tests in part to set large bank capital requirements. Now, changes to these stress tests are not expected to result in major changes to capital requirements, but the former head of supervision at the Fed, Michael Barr warned today that he thinks it could actually weaken the stress tests, make them less credible, and would actually lead to a weaker banking system and weaker capital requirements. Uh comments for these stress tests, um and the models that are going to be put out in greater detail are due next January.
