Banking and Finance Law Daily Advocacy group argues for Fed, FDIC to keep annual stress testing requirements
Wednesday, February 20, 2019

Advocacy group argues for Fed, FDIC to keep annual stress testing requirements

By Colleen M. Svelnis, J.D.

Consumer advocacy group Better Markets comments on revisions requiring a reduction in the frequency of stress testing made in response to section 401 of EGRRCPA, calling them unnecessary and inappropriate.

Consumer advocacy group Better Markets has submitted comment letters to the Federal Reserve Board and the Federal Deposit Insurance Corporation in response to proposals the agencies have put forth to reduce the frequency of company-run stress testing for state banks. Better Markets called the reduction in frequency of stress testing "unjustified" and not required to conform to the Economic Growth, Regulatory Relief and Consumer Protection Act (EGRRCPA).

Agency proposals. Consistent with changes made by section 401 of EGRRCPA, the Fed and FDIC put forth separate notices proposing to reduce both the number of state-member banks that must carry out company-run stress tests and the stress test requirements. They propose to revise the requirements for stress testing to raise the minimum threshold for applicability from $10 billion to $250 billion, change the frequency of required stress tests by most banks from annual to biannual, and reduce the number of required stress testing scenarios from three to two by eliminating the hypothetical adverse scenario (see Banking and Finance Law DailyDec. 18, 2018 and Jan. 9, 2019).

Better Markets comment. The comment letters sent to both the Fed and the FDIC acknowledge that some of the revisions were required by EGRRCPA, which requires raising the asset threshold for mandatory company-run stress tests from $10 billion to $250 billion and removing the "adverse scenario" from the list of mandatory stress testing scenarios. But, while EGRRCPA modified the Dodd-Frank Act by changing the statutorily required frequency of company-run stress tests from "annual" to "periodic," Better Markets disagrees with the agencies’ interpretation of "periodic." The Fed and FDIC propose to reduce the frequency of stress tests for most state banks from annual to biennial, stating in the comment letter that the Fed should exercise the discretion given in the EGRRCPA to "maintain the current frequency of company-run stress tests or even increase the required frequency." Better Markets asserts that the Fed made this change based on "little more than speculation, not robust analysis and certainly not a data-driven basis."

The comment letters make the following arguments.

  1. The current framework works because banks are safer while earning record profits under the current regulatory design.
  2. The proposals are "premature" and "dangerous" due to insufficient experience with stress tests to determine whether it is safe and appropriate to reduce the frequency of company-run stress tests. The letters contend that "in rapidly changing economic conditions during a period of market distress, tests conducted up to two years earlier will not be sufficiently current and are unlikely to be considered credible."
  3. The potential effects must be considered in light of the current deregulatory environment, which Better Markets states "will only compound the danger of reducing the frequency of company-run stress tests."

The comment letters conclude that a "proper analysis taking into account the following factors would lead to the conclusion that reducing the frequency of company-run stress tests would be unwarranted and inappropriate."

Companies: Better Markets

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