Over-reliance on stress tests raises legality concerns

Author: IFLR Correspondent | Published: 4 Oct 2016

Concerns have emerged regarding EU stress tests, notably the fact that they are being used as the principal and even exclusive tool to determine a bank’s financial viability

On September 15 2016, the Committee on Capital Markets Regulation released a paper questioning the legality of the US Federal Reserve stress tests on the grounds that stress test models, which result in the imposition of binding capital requirements, are based on economic assumptions that are not disclosed or subject public comment, in breach of procedural requirements under the Administrative Procedure Act.

Stress tests designed and implemented by the European Banking Authority (EBA) and the European Central Bank (ECB) also raise legality concerns under EU law. However, these concerns are based not on the stress test process itself but rather on the excessive reliance on stress test results in the supervisory process.

Stress tests are designed to measure institutions’ capital shortfalls...