On an important 'too big to fail' reform, the central bank seems to be unilaterally disarming
Last month, four of the five current governors of the Federal Reserve Board voted to weaken the stress tests that the nation’s largest banks are put through to increase their capacity to survive a financial crisis without collapsing. This was a serious misstep. Out of respect for the organization where I worked as a bank supervisor for 23 years, and where I oversaw the stress test process for seven years, I’ll call it an unforced error.
The qualitative assessment focuses on practices that support banks’ ability to run their businesses safely, to identify and assess risks, and to make informed decisions about the capital needed to survive another economic meltdown. Importantly, it also supports the Fed’s quantitative assessment.
In announcing the decision to scuttle the qualitative objection, the Fed assured us a similar, but not publicly disclosed, qualitative assessment will remain a key part of its supervision of the largest banks. Nonetheless, this decision all but guarantees the banks won’t put as much effort into maintaining or strengthening their practices as they have over the past nine years.
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