U.S. Banks Still Using Poor Risk Models
After examining the 30 biggest U.S. financial institutions for its annual stress tests, the Federal Reserve is reporting that banks continue to rely on weak risk models. Announcing publicly last week their concerns on this year’s tests, it was discovered during the stress test were assumptions that were poorly documented or supported, had select validation checks, and notions made without knowing if they were possible.
The Federal Reserve’s findings mirror an ongoing concern over banks’ reporting efforts. In January, global regulators encouraged the Financial Stability Board to make improved reporting a top priority. Additionally, Federal Reserve governor Daniel Tarullo has previously criticized the Basel III capital rules for allowing banks to implement their own models. Referencing unclear assumptions and inadequate support, Tarullo suggests banks rely more on stress tests to measure their well-being.
The introduction of the stress tests was a result of the 2007-2009 financial crisis, and seen as a means to lower the risk of taxpayers bailing out Wall Street. While U.S. financial institutions have made progress in withstanding another financial crisis, the Federal Reserve said additional work needs to be done to meet expectations.
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