American banks point the finger at the Fed and its own lack of transparency in conducting annual stress tests criticizing the excessively high requirements imposed on capital.
The credit giants, from Goldman Sachs to Citigrouppassing through JPMorganare ready to take the president of the American central bank, Jerome Powell, to trial, with the aim of preventing changes that are negative for the system.
Second Bank Policy InstituteAmerican Bankers Association and the US Chamber of Commerce, the organizations representing the large banks, there is in fact no certainty that the “reforms announced by the Fed can provide a timely remedy for the damage deriving from the current system”, characterized by a “lack of transparency resulting in significant and unpredictable volatility in capital requirements.”
Fed announces changes to stress tests
On Monday, December 23, the Fed announced its intention to make significant changes to its “stress tests” annual reports on large banks, in an attempt to make them more transparent and less predictable. The changes under consideration include publishing the models the central bank uses to determine the hypothetical losses banks would face under the review, as well as welcoming public comments on them.
The stress test, the Fed underlines in a note, evaluate resilience of large banks by estimating their losses, revenues and capital levels in a hypothetical recession scenario that changes every year. The capital serves as a buffer to absorb losses and allows banks to continue lending to families and businesses even during a recession. Since its inception more than 15 years ago, large banks in the stress test have more than doubled their capital levels, an increase of more than $1 trillion.
“The opaque nature of these tests undermines their value in providing meaningful insights into the resilience of banks,” said Rob Nichols, president and CEO of the American Bankers Association. “We remain hopeful that the Fed will address long-standing problems with stress testing, but this lawsuit preserves our ability to seek legal remedies if the Fed fails to meet its goals,” he added.
From now on 2008 subprime financial crisisbanks face an annual test to ensure the security of the entire system. Exams that have attracted criticism from many managers in the sector, convinced that the rules imposed create risks by pushing the financial activity that takes place outside the banks towards less transparent markets.
What the big banks ask for
In the legal action, the banks specify that they do not want to eliminate stress tests – a tool that has proven useful in restoring trust after the crisis. Rather, we want to ensure that capital requirements are established in a transparent manner. The annual exams could result, they warn, in “billions of dollars in unexpected capital charges for individual banks for no apparent reason and with adverse effects on the economy as a whole,” the lawsuit reads.
