Industry Takes Deep Breath Following Fed Stress Test Results

The Federal Reserve announced Wednesday that the largest U.S. banks have passed their annual stress tests and are capitalized to withstand severe economic and market shocks. The tests assessed the banks’ ability to handle scenarios such as a 40% drop in commercial real estate prices, significant aggregated losses, a severe recession, high unemployment, and a decline in home prices. The results indicated that the banking system remains strong and resilient, although they did not address concerns regarding the effectiveness of the Fed’s regulatory practices. “We should remain humble about how risks can arise and continue our work to ensure that banks are resilient to a range of economic scenarios, market shocks, and other stresses,” Michael S. Barr, the Fed’s vice chair for supervision said.

No CRO? Let D.C. Know: In response to recent bank failures, House Democrats have proposed a bill that would require banks with $50 billion or more in assets to have a chief risk officer. The legislation, introduced by Rep. Sean Casten, D-IL, mandates that banks notify regulators within 24 hours of a vacancy in the position and submit a plan for hiring a replacement within seven days. If the position remains unfilled after 60 days, the bank must inform the public and face limitations on asset growth. House Democrats have introduced 11 pieces of legislation related to this year’s bank collapses.

Capital Concerns: Federal Reserve Governor Michelle Bowman recently argued against higher capital requirements for U.S. banks, advocating instead for increased supervision. Speaking at a seminar in Austria, Bowman said higher capital requirements could impede lending and competition, and called for an independent review of recent bank failures. She emphasized the need for regulators to develop reforms that strengthen and enhance the resilience of the banking system. Bowman cautioned against policies that do not address the specific causes of bank failures and highlighted the potential negative consequences of misguided changes. “We need to consider whether examiners have the appropriate tools and support to identify important issues and demand prompt remediation,” Bowman said. “Increasing capital requirements simply does not get at this underlying concern about the effectiveness of supervision.”

‘Weak Links’: Finally, KPMG Regulatory Insights recently issued its “Ten Key Regulatory Challenges of 2023: Mid-Year Look Forward.” The report aims to answer key questions about future regulatory directions, overlooked risks, and what to plan for. The authors reflect on past regulatory actions and offer an outlook on factors to watch, including current banking events, public policy discord, and advances in automated systems. “Regulators are relentlessly pursuing what they perceive to be ‘weak links’ within risk programs and coverage,” said KPMG’s Amy Matsuo. “Expect increases across supervision, enforcement, and investigations under both old and new regulations—even with a heightened discord in public policy and increasing judicial challenges to regulatory authority.” 

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