RMA Regulatory Update

Oversight Panel Issues Report on Bank Stress Tests
by W. Bernard Mason, Regulatory Relations Liasion, Risk Management Association

A report issued on June 9, 2009 from the Congressional Oversight Panel for the Troubled Asset Relief Fund concluded that, while the Federal Reserve had used a “conservative and reasonable model” in conducting the recently completed stress tests, serious concerns and unanswered questions remain. The report suggested that, without relevant details, it is impossible for others to replicate the tests and there are key questions surrounding how the calculations were tailored for each institution as well as questions regarding the quality of the self-reported data. It also raised the concern that the testing horizon projected only through 2010 even though some experts fear commercial real estate defaults may rise beyond the testing horizon.

The report offered several recommendations for consideration:

• Should the actual average unemployment rate exceed the 8.9% assumed under the more adverse stress testing scenario, the stress tests should be repeated
• Stress testing should be repeated so long as banks continue to hold large amounts of toxic assets on their books
• Between formal tests, banks should be required to run internal stress tests and share results with regulators
• Regulators should have the ability to use stress tests in the future when they believe doing so would help promote a healthy banking system
  

The report further suggested that the Federal Reserve Board release more information, such as results of the “baseline” scenario, as well as details of the test methodology. The report also cautioned that banks should not be forced into “fire sales” of assets that may ultimately require the investment of even more taxpayer money.The full report may be found at the following link: http://cop.senate.gov/documents/cop-060909-report.pdf