WASHINGTON, D.C.— Shayna Olesiuk, Director of Banking Policy, issued the following statement in connection with today’s filing of a comment letter to the Federal Reserve (“Fed”) on proposed modifications to its stress test framework.

“The only thing standing between a failing bank, a financial crisis, a taxpayer bailout, and economic and human catastrophe is bank capital. If a bank has enough capital to absorb its own losses, then it won’t fail, cause a crisis, or require a taxpayer-funded bailout. This is why the Fed’s proposed changes to the stress testing framework for the largest, most complex banks are so dangerous.

“The Fed has proposed two changes that fundamentally undermine the value of its stress tests. First, it would average stress test results over two years, rather than evaluate and take action based on the most current results from the most recent year’s test alone. Given the speed of change in our economy and financial system, results from the prior year’s test are ancient history, and are irrelevant when evaluating a bank’s condition this year. This change also would mask the tail risk that the stress test should be detecting and wrongly ignore the volatility that inherently exists in our economy and financial system. Second, the Fed would extend the time that banks have to comply with the stress capital buffer that results from the stress test by one quarter. Extending this date only helps the banks, while leaving the American people and the financial system exposed and vulnerable to increased risk for longer.

“The bottom line is that the proposed changes make the Fed’s stress tests less valuable and less sensitive to deterioration in bank conditions that could lead to a failure or a banking crisis. The largest banks pose the greatest threat to financial stability if they fail and should therefore be subject to the strictest stress tests.”

The Comment Letter is available here.

###

Better Markets is a non-profit, non-partisan, and independent organization founded in the wake of the 2008 financial crisis 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.