Stress tests under stress of scrutiny
In the aftermath of the financial crisis, regulators on both sides of the Atlantic took steps to guard against a repeat. In addition to sweeping reform bills, one of the primary means of protecting investors is the stress tests. But, as the Financial Times notes, the stress tests are conducted in a world that is not fixed and events – more often than not – are uncertain.
Acknowledging the tests were tough, columnist Patrick Jenkins notes that “the Fed did not model for any sovereign default or for any of the economic doomsday scenarios that should arguably have been considered. The much criticised European Banking Authority – the pan-EU body in charge of Europe’s tests – took a tougher stance.”
A member of the European Banking authority, Matthew Elderfield believes a review of the tests should be performed in the coming year when European banks are not subject to them.
“I would like to see that we use this breathing space wisely to consider the future design of stress tests and the operational flexibility of firewall structures,” Elderfield said.
As mandated by the Dodd-Frank reform law, the Federal Reserve must write rules outlining how annual tests will be conducted in years to come, but response from the banks to the initial round has not been glowing, reports the Wall Street Journal.