BOSTON, Sept. 15, 2016 /PRNewswire/ -- The Federal Reserve's annual stress tests are about to get much harder, because the Fed is set to substantially increase the applicable capital requirements. Harder stress tests may mean that the largest U.S. banks would be unable to remit more profits to their shareholders and could also dampen economic activity.
But today, the Committee on Capital Markets Regulation, which includes representation from the country's largest banks, asset managers, hedge funds and leading academics, is releasing an analysis showing that the Fed's stress test process is more opaque than necessary and that this may be compromising the quality of the stress tests and increasing costs for U.S. banks with assets over $50 billion.
Importantly, the Administrative Procedure Act of 1946 requires that government agencies act in a transparent manner when enacting rulemakings. The Committee's report finds that the Fed's stress test process may violate the APA and, as a result, its corresponding restrictions on bank dividends and share buybacks could be subject to a successful judicial challenge. This would be a blow to the Fed's post-crisis efforts to enhance the stability of the financial system.
According to Hal Scott, director of the Committee and professor of international financial systems at Harvard Law School, "Our concern is with the Fed's development of the economic assumptions and statistical models used in its stress tests. Enhanced transparency for the assumptions and models would improve the quality of the Fed's stress tests and ensure that they could withstand a judicial challenge."
The report can be accessed here: http://capmktsreg.org/news/apa-statement
Press inquiries may be directed to the Committee's Executive Director of Research, John Gulliver at: firstname.lastname@example.org
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SOURCE Committee on Capital Markets Regulation