Opinion

If the Fed Puts its Stress Test Results in the Shadows, It Will Backfire

Kim Schoenholtz

By Kim Schoenholtz and Stephen Cecchetti

By Kim Schoenholtz and Stephen Cecchetti

The Federal Reserve said last week that it plans to limit the disclosure of this year’s large bank stress tests. An announcement of the results is due later today. If it goes ahead with the plans, they are likely to prove self-defeating.

Failure to disclose the individual banks’ outcomes of this year’s Covid-19 “sensitivity analysis” tests will weaken the credibility and effectiveness of the Fed’s stress testing regime. To put it bluntly, the main point of a supervisory stress test is disclosure. Anything short of full transparency risks financial instability.

There are three key elements of an effective stress testing regime that have characterised the Fed’s tests since the extraordinary 2009 Supervisory Capital Assessment Program (SCAP). These are severity, flexibility, and transparency.

Read the full Financial Times article.
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Kim Schoenholtz is Henry Kaufman Professor of the History of Financial Institutions and Markets and Director of the Center for Global Economy and Business