WASHINGTON, D.C.— Dennis M. Kelleher, Cofounder, President and CEO, issued the following statement on the Federal Reserve’s release of the 2023 Dodd-Frank Act stress test results:
“Wall Street is the new Lake Wobegon where every gigantic bank again passed the Federal Reserve’s latest Dodd-Frank Stress Tests. But Wall Street being Wall Street, those banks aren’t just all above average; they all ‘aced’ the test again, as they have year after year after year regardless of how dire and unpredictable the macroeconomic environment.
“This is dangerous, misleading, incomplete, and results in false comfort. Dangerous because the only thing standing between a failing bank and a government bailout is capital and the stress tests results have become justifications for the banks to eject tens of billions of dollars in capital in the form of share buybacks and dividends. Misleading because the largest banks are almost certainly undercapitalized given the huge risks they run and the catastrophic dangers they pose to all Main Street Americans, small businesses, community banks, and other future innocent victims of undercapitalized giant banks. Incomplete because the test was published a month before Silicon Valley Bank collapsed and it failed to include shockingly obvious risks like those that arise from interest rate increases – in fact, the so-called stress test actually posits a falling rate environment, which is the exact opposite of reality.
“Moreover, it’s never mentioned, but the known material risks and consequences of undercapitalized banks are much greater than the theoretical consequences from banks having marginally more capital than necessary. That was just proved again by the failures of and the $31.5 billion bailout costs for Silicon Valley Bank, Signature Bank, Silvergate Bank, and First Republic Bank, not to mention the catastrophic damage from the 2008 crash which was also largely driven by banks having too little capital. There has never been a crisis caused by banks having too much capital, but the Fed is overly focused on trying to calibrate the minimum amount of capital required rather than ensuring banks have more than enough capital to support the real economy and protect the American people.
“Compounding those errors, the stress tests this year were applied to only 23 rather than 34 of the largest, most complex banks because the Fed, wrongly believing they were not systemic, deregulated 11 banks with between $100-$250 billion in assets, four of which have now failed. The banks that were tested passed because deregulation has taken the stress out of the stress tests, as detailed here. They also passed because the ‘regulatory capital minimum,’ the metric set by regulators, is clearly too low. And, finally, they passed because the regulators and supervisors that run the stress tests are some of the same people who failed to regulate, supervise, foresee, or prevent the collapses of the four recent banks, as detailed in part in damning reports by the Fed and FDIC. Given that, including especially the many egregious, broad, deep, repeated and years-long failures of regulators, the American people should take little comfort in today’s announced results.
“In reality, the 2023 stress test results merely suggest that the 23 tested banks might meet regulatory capital minimums under the scenarios designed and tested by regulators. In that context, the banks are reported to have an aggregate minimum common equity capital ratio of 10.1 percent during the two-year test horizon under stressed conditions, down from 12.4 percent in fourth quarter 2022, but still above the regulators’ minimum. Thus, if the future plays out exactly as the regulators’ stress test scenarios assume, then the regulatory capital minimums should be sufficient.
“However, the Fed has a very poor record of accurately predicting the future. If actual future economic or financial market conditions deteriorate beyond the Fed’s scenarios or play out differently as is likely, then the reported strength of the banks could well be an illusion. And that is a very dangerous illusion for two reasons. First, Wall Street banks and their many political allies and lobbyists use the stress test results to justify ejecting massive amounts of capital that could have been used to prevent future crashes and providing additional lending to the economy. Second, they also use the results to claim the banks are strong and don’t need any additional capital, using them as club to beat back appropriately strong capital rules that are in fact necessary.
“The Fed should require all large banks to have more than enough capital to avoid failure and bailouts that all Americans ultimately pay for. The Fed should do that by enacting immediately effective interim final rules to reverse the deregulation that happened starting in 2017, including those that took the stress out of the stress tests.”
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Better Markets is a non-profit, non-partisan, and independent organization founded to promote the public interest in the financial markets, support the financial reform of Wall Street and make our financial system work for all Americans again. Better Markets works with allies—including many in finance—to promote pro-market, pro-business and pro-growth policies that help build a stronger, safer financial system that protects and promotes Americans’ jobs, savings, retirements and more. To learn more, visit www.bettermarkets.org.
