For Fed stress tests, U.S. banks form a study group

Tue Dec 9, 2014 1:05am EST
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By Peter Rudegeair

NEW YORK (Reuters) - Executives at the biggest U.S. banks are sharing notes with each other before their next round of tests with federal regulators.

Banks are struggling to figure out what exactly the U.S. Federal Reserve is looking for when it conducts its annual "stress tests," which measure how banks will hold up during times of economic turmoil, bank executives, former Fed officials and consultants involved in the process told Reuters.

In gatherings organized by industry groups as well as more informal forums, executives say they have swapped tips about everything from how to best communicate their data – regulators evidently appreciate robust summaries -- to how to project legal losses in a hypothetical downturn.

The Federal Reserve deliberately keeps quiet about how it measures lenders' performance during downturns, to prevent banks from finding loopholes in the process that would allow them to take more risk, senior regulators have said publicly. It has given banks a little more information recently, but many executives still gripe about the tests.

"You put something in and one year it's okay and the next year they say 'no,' and you're scratching your head," said one bank executive. The executive, like others that spoke to Reuters, spoke about the stress tests on the condition of anonymity.

A few years ago, banks might have hesitated to share information with rivals about how they measure risk and how they communicate with the Federal Reserve. Their willingness to talk to competitors about these issues underscores just how exasperated they are with the process.

The Fed does not mind the information sharing, because the banks do not share confidential supervisory information and it is not collusion in any legal sense - it does not result in price fixing or evidently hurt customers in any other way, the executive said. A Fed spokesman declined to comment.

Regulators have multiple tools for keeping banks in check, including global capital rules known as "Basel III," which rule-makers world-wide have been crafting for years. But Basel III is viewed by the Fed as flawed, because it gives so much leeway to banks to measure how risky certain assets are.   Continued...

The United States Federal Reserve Board building is shown behind security barriers in Washington October 28, 2014. REUTERS/Gary Cameron