July 9, 2019 / 6:15 PM / 14 days ago

Fed's Quarles vows more transparency around stress tests to come

BOSTON (Reuters) - Federal Reserve Vice Chair Randal Quarles said Tuesday the Fed will continue to give banks more information about its annual stress tests, and will push ahead with a plan to create a simpler capital buffer for banks.

FILE PHOTO: Federal Reserve Vice Chairman for Supervision Randal Quarles addresses the Economic Club of New York in New York City, U.S., October 18, 2018. REUTERS/Brendan McDermid

In prepared remarks, Quarles said the Fed is preparing to shed further light on the models it uses to test banks and the scenarios it concocts to test their books against hypothetical economic downturns during each year’s tests.

And in the “near future,” Quarles said he anticipates the Fed will move forward in its effort to create a “stress capital buffer,” which would reduce the number of capital requirements imposed on banks.

That idea, first proposed in April 2018, is an effort to make the stress testing regime fall more in line with the Fed’s traditional supervisory work, and make its requirements more flexible to address each firm’s specific characteristics. Quarles said in November the Fed was reconsidering certain parts of that proposal, after banks complained it was too restrictive.

Meanwhile, the Fed will continue to give banks more information about the models it uses to conduct the stress tests until it has made public information about all of its models.

The Fed provided more information about two of its testing models in the most recent round of stress tests, and will do the same for two more models in 2020, Quarles said, with similar disclosures to follow in future years.

The Fed is also considering providing more information about the scenarios it creates for each year’s tests, and how it devises those hypothetical economic downturns.

He dismissed concerns that too much disclosure of the Fed’s methods could make it easier for banks to pass the test, arguing that the goal of the process is not to fail banks, but to help them build robust risk management and capital plans.

“If the measure of success for the Fed in administering a stress test was simply how many banks failed, then greater transparency would indeed be a mistake,” he said, according to prepared remarks. “But that is not the purpose of stress testing, and it never has been.”

Quarles’s comments came at a daylong Fed conference on the future of its stress tests, which just wrapped its tenth year and saw all 18 banks tested pass. Banks have long griped that the test is opaque and onerous, and can make it overly difficult for them to plan how to distribute capital to shareholders.

Reporting by Pete Schroeder; Editing by Chizu Nomiyama

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