Last week, the Federal Reserve hosted a stress testing conference in Boston, MA. The conference brought together regulators, bankers, economists, and others to discuss the most important annual check on the stability of the banking system.
The initial stress test conducted in 2009 was described as a “wartime” test meant to reassure the public that the system was solvent, and it was very effective. A decade later, the economy is far less dire, which was reflected in this year’s ninth annual test, a “peacetime” test. The participating institutions all passed, although JP Morgan Chase and Capital One struggled and had to adjust their capital plans to meet minimum thresholds. This success paves the way for increased capital distributions. Although most bankers and regulators will find the results to be good news for the industry, conference attendees’ sentiment towards future tests were divided. Some attendees favored increased transparency of the models and scenarios, including the Fed Chairman and Vice Chairman, while others preferred continued maintenance of some level of opacity. The two perspectives made for spirited discussions that volleyed between the benefits of each angle.
Proponents of transparency are already making strides. Earlier this year, the Fed published their first Stress Testing Policy statement, an eighty-page document containing specific details of two key models along with loss rates, and plans to release similar information every year going forward. The Fed is also contemplating issuing specific details on the scenarios and scenario design.