CCH Financial Reform News Center

Geithner Comments on European Stress Tests

This story appeared in Bank Digest.

Following the stress tests results by the Committee of European Banking Supervisors, Treasury Secretary Timothy Geithner released a statement “welcoming” the release of the results. Geithner added, “With this undertaking, the EU has made a significant effort to increase disclosure on the conditions of individual European financial institutions and  enhance market stability.”

Lessons From Stress Tests Examined

This story appeared in Bank Digest.

Federal Reserve Board Governor Daniel K. Tarullo discussed the Fed’s experience with the Supervisory Capital Assessment Program, or “stress testing” of major financial institutions, during the financial crisis. Tarullo made his remarks before the Federal Reserve Board International Research Forum on Monetary Policy in Washington, D.C. Tarullo noted that a crisis accelerates adoption of policies and practices that might beneficially have been implemented beforehand and then are sensibly continued after the crisis has passed. He noted that the stress tests required development on the fly, and under enormous pressure, of ideas that academics and supervisors had been considering for some time. The Fed Governor also discussed the rationale for releasing the results of the stress tests to the public. Tarullo noted, “it is clear that the public release of the SCAP results played an important role in stabilizing the financial system.”

Nine of 10 BHCs Have Met Stress Test Capital Buffer Requirements

This story appeared in Bank Digest.

The Federal Reserve Board has announced that nine of the 10 bank holding companies (BHCs) that were determined in the Supervisory Capital Assessment Program, known as the “stress test,” earlier this year to need to raise capital or improve the quality of their capital to withstand a worse-than-expected economic scenario now have increased their capital sufficiently to meet or exceed their required capital buffers. The one exception, GMAC, is expected to meet its remaining buffer need by accessing the TARP Automotive Industry Financing Program and is in discussions with the U.S. Treasury on the structure of its investment.

BaFin Adopts New Risk Management and Executive Compensation Regulations

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

In light of the financial crisis, and in reaction to the G-20 mandate, The German Federal Financial Supervisory Authority (BaFin) has adopted new regulations for risk management and executive compensation at banks and other financial institutions. The new risk management regualtions enhance stress testing, liquidity risk and oversight of risk concentrations. The executive compensation regulations are modelled on principles enunciated by the Financial Stability Board and endorsed by the G-20. The regulations apply to German financial institutions, including branches of German institutions abroad. BaFin Executive Director Sabine Lautenschlager said that the financial crisis has pointed to the utmost importance of financial institutions implementing effective operational risk management systems.

Guidance Provided for Risk Weighting Downgraded Securities

This story appeared in Bank Digest.

Due to the recent stresses on the financial markets and the large number of rating downgrades regarding certain mortgage-and asset-backed securities,the Office of Thrift Supervision has provided guidance and examples of how to risk weight downgraded securities.
http://files.ots.gslsolutions.com/25307.pdf

Need for Further Bank Stress Tests Likely, Oversight Panel Concludes

By Sarah Borchersen-Keto, CCH Washington News Bureau, Contributing Author, the CCH Federal Banking Law Reporter.

A strong case can be made for six-month repetitions of bank stress tests for the next few years, the Congressional Oversight Panel, the watchdog body overseeing implementation of the Troubled Asset Relief Program (TARP), said in its latest report released June 9.

The panel, headed by Harvard University law professor Elizabeth Warren, concluded that repeating the tests could be justified given the questions that have been raised about the economic assumptions made by regulators and the continuing uncertainty around the value and terms for write-down of many bank assets.

Congressional Oversight Panel Releases Report on Stress Tests

This story appeared in Bank Digest.

The Congressional Oversight Panel has released its June Oversight Report, “Stress Testing and Shoring Up Bank Capital,” which examines the recent stress tests conducted on America's 19 largest bank holding companies (BHCs). The Panel's report examines how effectively Treasury and the Federal Reserve conducted the stress tests--the Supervisory Capital Assessment Program. The Panel concluded that the stress tests were reasonable; however, serious concerns remain, and the Panel offers several recommendations for consideration moving forward:

• If the monthly unemployment rate continues to increase, the 2009 average may exceed the 8.9%, suggesting that the stress tests should be repeated if that occurs.
• Stress testing should also be repeated so long as banks continue to hold large amounts of toxic assets on their books.
• Between formal tests conducted by the regulators, banks should be required to run internal stress tests and should share the results with regulators.
• Regulators should have the ability to use stress tests in the future when they believe that doing so would help to promote a healthy banking system.