US bank stress tests too stringent, opaque

Author: Edward Price | Published: 31 May 2016

The Clearing House is calling for greater transparency in US bank stress tests, arguing that excessive stringency in bank stress tests can dampen lending to the real economy.

A recent report published by the trade group,  Comparison between United States and European Union Stress Tests, compares the approach of US and EU banking authorities.

Those approaches diverge. The European Banking Authority’s (EBA) test scenario for the 2016 EU-wide stress tests assumes a moderate recession. In its report, The Clearing House contrasts this with the Federal Reserve’s stress test scenario under the Comprehensive Capital Analysis and Review (CCAR) regime. That entails a hypothetical recession significantly worse than that associated with the 2007-2009 financial crisis. 

Francisco Covas, The Clearing House "The design of supervisory stress scenarios in the US is extremely stringent. US regulation is requiring US banks to hold even more equity than they already have,"...