ALERT: Congressional Oversight Panel Report "Stress Testing and Shoring Up Bank Capital"

June 9, 2009

Earlier today, the Congressional Oversight Panel, which is charged with reviewing the state of the markets, current regulatory system, and the Treasury Department's management of the Troubled Asset Relief Program, released its June report entitled “Stress Testing and Shoring Up Bank Capital.”  The panel engaged two experts in risk analysis from the University of California at Berkeley to review the stress test methodology.  I've attached the report, which includes a three page executive summary, to this email.

In the report, which generally praises the stress tests performed on the 19 largest bank holding companies, the COP recommends that the Treasury Department and the Federal Reserve should repeat the stress tests of the nation's largest banks if its assumptions about the severity of the economic downturn were too optimistic.  For example, the test's model assumed an average unemployment rate of 8.9 percent this year, yet the unemployment rate for last month climbed to 9.4 percent.  The report also criticizes the stress tests for not providing enough detail, preventing others from running their own versions of the stress tests.

The COP also recommends that the banks be subject to further stress tests as long as they continue to hold large amounts of toxic assets on their books. Regulators should retain the power to conduct stress tests even beyond that time, and that banks should be required to run internal evaluations between federal tests and share the results with regulators.

Written by Matthew Kulkin