Today, the House Financial Services Subcommittee on Financial Institutions and Monetary Policy, led by Chairman Andy Barr (KY-06), is holding a hearing entitled “Stress Testing: What’s Inside the Black Box?”
Chairman Barr's opening remarks highlighted the importance of stress testing for banks, consumers, and the financial system. He emphasized that stress tests demonstrate that the U.S.'s largest banks are well-capitalized, resilient, and capable of functioning throughout economic cycles. However, he criticized the Federal Reserve for conducting these tests under a "veil of secrecy," arguing there is no legal basis for such opacity.
Barr stated, "No one disputes that the stress tests are used in binding capital requirements, including the stress capital buffer, and can be used to restrict banks from paying dividends." He called for transparency and accountability in the process by subjecting scenarios and models to public scrutiny through a notice and comment rulemaking process.
He anticipated counterarguments suggesting that key aspects of stress tests must remain secret to prevent banks from gaming the system. Barr dismissed these concerns as legally untenable and argued that if disclosing models led to better performance without improved risk profiles, it would indicate weaknesses in the models themselves.
Barr also expressed concerns about potential politicization within federal banking agencies. He warned that officials with political agendas could manipulate models to achieve desired outcomes like heightened capital requirements or reduced dividends.
He noted that stress tests impact real-world decisions made by banks regarding capital allocations and lending practices. This conservatism affects families, farmers, and small businesses relying on bank credit. Additionally, stress tests influence how much dividends banks can pay out to shareholders.
The hearing builds on ongoing efforts by the Committee to improve the stress testing regime. Barr referenced his bill, the Bank Resilience and Regulatory Improvement Act, which mandates disclosure of underlying models and assumptions used in stress tests and requires public comment on annual scenarios.
In conclusion, Barr urged for transparency from the Federal Reserve while commending his colleagues for advancing significant legislation aimed at addressing these issues.