On November 15, the GAO released its report entitled Federal Reserve: Additional Actions Could Help Ensure the Achievement of Stress Test Goals. The report had been requested in September 2014 by House Financial Services Committee Chairman Jeb Hensarling in order to determine the costs, benefits, effectiveness and transparency of the Fed’s stress tests. Highlights of the Report can be found here.
The GAO was asked to review and assess the effectiveness of each of the Fed’s two stress test programs for certain banking institutions. Accordingly, the GAO analyzed Fed rules, guidance, and internal policies and procedures and assessed practices against federal internal control standards and other criteria. The GAO also interviewed Federal Reserve staff and officials at 19 banking institutions. The report sets forth 15 recommendations that the GAO believes will help improve the effectiveness of the Fed’s stress test programs. The recommendations include, among other things, improving disclosures and communications to firms, expanding model risk management, and reconsidering potential consequences of the Fed’s scenario design choices. The GAO has reported that the Fed “generally agreed with the recommendations and highlighted select ongoing and future efforts.”
In a November 15 press release, House Financial Services Committee Chairman Jeb Hensarling used the GAO report to critique the Fed’s lack of transparency with regard to certain activities under the Dodd-Frank Act. Among other things, Rep. Hensarling stated, “[t]he GAO report confirms the secrecy surrounding the stress tests makes it almost impossible to measure the effectiveness of the Fed’s regulatory oversight or the integrity of the tests’ findings. When it comes to the Fed’s stress tests, not only are they not transparent, they are often duplicative and impose unnecessary costs and burdens on financial institutions that are ultimately passed on to consumers.” Rep Hensarling cautioned further that “[t]he changes recently proposed by the Federal Reserve to its stress testing process are inadequate,” and the GAO report “demonstrates the absolute need for the new President to designate a Vice-Chairman for Supervision at the Federal Reserve who will have the power to ‘oversee the supervision and regulation’ of financial firms supervised by the Federal Reserve.”