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The Federal Reserve is weighing “significant changes” in its annual stress tests for major US banks that could reduce the volatility of test results and make the process more transparent.
The Fed did not provide a detailed statement of the change but said that it can adjust the model that calculates the estimated losses in banks, the estimated results in two years to reduce the risk of large changes from year to year, and allow the public to comment on the hypothetical. Conditions each year before they are completed.
The Fed said the change was not intended to “materially affect capital levels”.
“The regulatory framework has changed significantly in recent years,” the Fed said in a statement. “The board analyzed the current stress test in light of the evolving legal environment and intends to modify the test in important areas to improve its effectiveness.”
The Fed said the revision was in response to recent changes in the regulatory framework, which was boosted earlier this year by the US Supreme Court's decision to overturn the so-called “Chevron deference”. The ruling focused on federal agencies' latitude in technical rules and regulations.
The transparency of these tests and the uneven results have become areas of concern for the banking industry. The Center for Banking Policy, a business advocacy group, welcomed the Fed's announcement as a step toward “transparency and accountability.”
Stress testing is an annual exercise at major US banks including JPMorgan Chase and Goldman Sachs. Their businesses are put through a series of doomsday scenarios to calculate the appropriate capital requirement for each lender. Capital is used to absorb potential losses.
This assessment was crucial in restoring confidence in the banking sector after the 2008 financial crisis. However, in recent years it has lost a lot of its drama and banks that easily get out of speculative situations with enough money. Bank executives have criticized transparency tests and produced highly variable results.
Earlier this year, Goldman became the first US bank successfully challenged The Fed is on top of its stress tests and has successfully cut its largesse requirements as a result.
The change in stress testing could end up being another victory for the banking industry, which is already hoping for a tough implementation of the so-called. Basel III name Capital laws in the second Trump administration.
The original Basel reform plan was announced last year by Fed vice-chairman Michael Barr, but was shelved due to the unsustainable banking industry. Its final outcome will be influenced by the incoming Trump administration.