The Bank Policy Institute (BPI) has voiced its support for the Stress Testing Accountability and Transparency Act, known as H.R. 5270, in a letter addressed to Congress. The legislation is sponsored by Representative Bill Huizenga (R-MI).
According to BPI, the current Federal Reserve stress testing system uses models and scenarios to set bank capital requirements without adequate transparency or adherence to notice-and-comment procedures required by the Administrative Procedure Act. The organization argues that this lack of transparency can lead to inaccurate results and increased volatility, which may result in reduced credit availability, slower job growth, and decreased market liquidity.
BPI stated: "The current Federal Reserve stress testing regime is administered illegally by utilizing models and scenarios to develop a bank’s capital requirements that are not disclosed transparently and not subject to a notice-and-comment process as required under the Administrative Procedure Act. As a result, these stress tests have often resulted in inaccurate and volatile results that impose significant economic costs, including reduced credit availability, slower employment growth and decreased market liquidity."
The group describes the proposed act as a measure that would require the Federal Reserve to use formal rulemaking processes when establishing its annual stress test models, assumptions, formulas, and methodologies. "The Stress Testing Accountability and Transparency Act is an important step forward in correcting these issues and ensuring that the Federal Reserve’s stress testing framework is carried out in a more transparent and accountable manner by requiring the Federal Reserve to codify through notice-and-comment rulemaking the models, assumptions, formulas and methodologies underlying its annual stress tests and the stress capital buffer," BPI said.
BPI also noted: "BPI strongly believes that the Stress Testing Accountability and Transparency Act will help make the stress testing regime more accountable while ensuring that capital that otherwise could be used to fuel economic growth isn’t left on the sidelines. While the Federal Reserve has signaled that it will be making many of these changes on its own, ensuring that these standard processes and good governance measures are enshrined in statute will provide banks with greater certainty that these supervisory tools are conducted fairly and accurately."
In its statement, BPI commended Representative Huizenga for his work on this issue: "We commend Representative Huizenga for his leadership on this issue, and we urge the Committee to advance this legislation."
The Bank Policy Institute represents universal banks, regional banks, and major foreign banks operating in the United States. It conducts research on regulatory topics relevant to monetary policy as well as cybersecurity concerns within financial services.