The Fed’s Bank Stress Test Proposal Would Only Heighten Uncertainty

The justifications for the proposed changes to large bank regulatory capital requirements in the so-called “Basel III end-game” Notice of Proposed Rulemaking are schizophrenic. 

Regulators argue that bank internal model credit risk capital requirements must include a new standardized approach to determine a floor for the credit risk capital a bank must hold. The change is allegedly needed because banks’ internal credit model loss estimates are inaccurate and virtually impossible to verify. 

Fair enough. Yet the same notice ignores these concerns when it expands the use of the Fed’s own secret internal stress test loss models to decide whether large bank stress capital buffers should be higher than 2.5 percent.

Continue reading here…