WASHINGTON: The Federal Reserve will give banks more details on how it conducts annual stress tests, including the qualitative part of the tests, when it publishes the results later this month, Chair Janet Yellen said Friday in a letter to Congress.
The Federal Reserve will provide specific examples from past years’ problems with banks’ capital planning practices, Yellen said in a letter dated June 16, a copy of which was seen by Reuters. The letter was sent to Representative Blaine Luetkemeyer, who chairs a subcommittee overseeing financial institutions on the U.S. House Financial Services Committee.
The Federal Reserve would commit to publishing instructions for the stress tests at the same time as the supervisory scenarios, by Feb. 15, said Yellen, whose letter was a response to a May letter from the congressman, who had pressed for additional transparency around the annual stress tests.
Yellen’s response comes after years of wrangling with Wall Street, lawmakers and even a federal watchdog about how transparent the stress tests should be.
Last year, the U.S. Government Accountability Office, a nonpartisan entity that reviews government operations, recommended that the Fed should share more about its process with big banks. The banks had increasingly complained that stress tests were befuddling.
The Fed has gradually eased off its black-box approach, but regulators maintain stress tests need to have some mystery so that banks cannot undermine the process.
It has said it will tell banks more about the “qualitative” part of the exam, which examines concepts like risk management, and provide more feedback on the quantitative aspect.
Still, officials say that releasing models publicly would allow banks to effectively work around the system.
“We are concerned that releasing all details on the models would give banks an incentive to adjust their business practices in ways that could change the results of the stress test without changing the risks faced by the firms,” Yellen said in her letter.
The Fed will release its 2017 test results beginning June 22. The results of its Comprehensive Capital Review and Analysis (CCAR) tests, which dictate whether banks can pursue capital distribution plans, will be released on June 28.
Earlier this month, Fed Governor Jerome Powell said the Fed was committed to boosting transparency around the process. In a June 1 interview with CNBC, he said the Fed plans to give more granular information about how its model tests generic portfolios.
Powell, a Republican, recently took the reins as chief regulatory official at the central bank.
The Fed did not immediately respond to a request for comment.