Yellen Defends Stress Tests as GOP Presses for Revamp

By Jeff Bater

Federal Reserve Chair Janet Yellen is pushing back against Republican calls to curtail the regulator’s annual assessments of whether big banks can withstand another financial crisis.

Yellen, testifying at a Senate Banking Committee hearing Feb. 14, called the annual Comprehensive Capital Analysis and Review (CCAR) “a key part of our regulatory process.”

“It is a very detailed and institution-specific and forward-looking assessment of the risks in the firm’s balance sheet,” Yellen said. “And I think it’s been a cornerstone of our efforts to improve supervision.”

The CCAR is part of the Fed’s policy tool kit for judging whether systemically important banks can absorb external stress, such as a severe economic downturn. As part of the review, the Fed can object to a bank’s capital plan based on either quantitative or qualitative grounds. If the regulator objects, the bank may not make any capital distribution unless the Fed indicates in writing that it does not oppose the distribution.

Yellen’s remarks were in response to questioning by Sen. Pat Toomey (R-Pa.), who said the CCAR exercises are duplicative and should be eliminated. Last week, House Financial Services Committee Chairman Jeb Hensarling (R-Texas) proposed a number of changes to regulatory stress testing, including less frequent exams, as part of his plan to dismantle the Dodd-Frank Act.

Toomey said compliance with the CCAR is “enormously expensive” for banks subject to the test.

“I’m concerned that CCAR might actually increase systematic risk in one important respect by correlating the risks of bank behavior and allocation of capital,” he said.

Yellen said the Fed has offered some relief from stress testing by allowing institutions with less than $250 billion in assets to forgo the so-called qualitative part of the CCAR.

“But I do think that stress testing has greatly strengthened our process of supervision,” she told senators.

Republican critics have also said that the Fed’s evaluation process is shrouded in secrecy. Yellen told the Banking Committee that the Fed is working to improve transparency as recommended by the Government Accountability Office in a November 2015 report.

To contact the reporter on this story: Jeff Bater in Washington at jbater@bna.com

To contact the editor responsible for this story: Michael Ferullo at MFerullo@bna.com

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