Yellen: We may change stress tests, capital buffers for banks
WASHINGTON (Reuters) – The Federal Reserve is considering changes to the annual stress tests it gives US banks to move to a more risk-sensitive, firm-specific approach that will raise capital requirements for big banks based on their test results, Fed Chairwoman Janet Yellen said Wednesday.
Testifying at a House of Representatives Financial Services Committee hearing, she said the Fed is “now considering making several changes to our stress-testing methodology and process.” The stress tests aim to prove that individual banks can withstand a massive financial crisis.
Under the changes the Fed is considering, banks would set capital requirements, called capital buffers, that banks must maintain to blunt the effects of a downturn based on the results.
“The existing capital conservation buffer would be replaced with a risk-sensitive, firm-specific buffer that is sized based on stress-test results,” Yellen said.
For the eight US banks that are large and considered important to the global financial system, the new buffer calculation “would result in a significant aggregate increase in capital requirements,” she said.
Yellen did not comment on the outlook for the economy or monetary policy in her prepared remarks.
Her remarks are the latest about possible changes in the central bank’s oversight of the country’s banking system, as Republicans in Congress criticize its regulation of financial institutions under powers it was given by the 2010 Dodd-Frank Wall Street reform law.
Fed Governor Daniel Tarullo gave a detailed speech on potential reforms on Monday, and last week the central bank outlined a plan to limit Wall Street bets on the energy sector.
Yellen told the committee that, in general, large and regional banks are currently well capitalized and profitable, and the Fed is seeing growth in commercial and industrial lending. Banks have faced some challenges in recent years because of weak growth in interest and noninterest income, she said.