Should Banks Have to Do One Stress Test Per Year Instead of Two? (H.R. 4293)

What is H.R. 4293?

(Updated May 22, 2019)

This bill would aim to improve the stress testing process for financial institutions by requiring them to prepare an annual report instead of two per year. It would also prohibit the Federal Reserve from using its qualitative assessment of an institution’s ability to withstand financial stress as a basis for objecting to that firm’s plan to draw down capital.

The Federal Reserve would be required to issue regulations subject to notice-and-comment for conducting stress tests that set forth economic conditions and methodologies. It would also have to assess the effect of the Fed’s stress testing models and methodologies on financial stability, credit availability, model risks, and investment cycles.

Additionally, the Federal Reserve would also have to issue regulations subject to notice-and-comment for its Comprehensive Capital Analysis and Review (CCAR) program. It would be prohibited from subjecting an institution to its CCAR program more than once every two years and from objecting to a firm’s capital plan based on qualitative deficiencies. Further, the Fed would be required to establish procedures to respond to inquiries from firms subject to the CCAR program.

Argument in favor

This bill would make common sense changes to the stress testing process banks go through each year, ensuring they’re still prepared to handle financial stress while reducing the number of stress tests.

Argument opposed

This bill would make harmful changes to the stress testing process for banks, making it more likely that banks will take excessive risks and undermine the stability of the financial systems.

Impact

Financial institutions; and regulators.

Cost of H.R. 4293

The CBO estimates that enacting this bill would increase the deficit by $14 million over the 2018-2027 period.

Additional Info

In-Depth: The House Financial Services Committee explained why Rep. Lee Zeldin (R-NY) introduced this bill in its committee report:

“In an effort to inject badly needed accountability, transparency, and targeted relief into the stress test processes, this legislation introduced by Congressman Zeldin, and amended by Congressman David Scott (D-GA), makes a number of important reforms. H.R. 4293 would overhaul the current regime for stress testing banks and would make the company-run stress test an annual exercise, reduce the number of supervisory scenarios from three to two — the baseline and severely adverse scenario — and extend the Federal Reserve’s regulatory relief from CCAR’s qualitative assessment to all banks.”

Most Democrats opposed this bill in committee, writing:

“One of the most important policy developments following the largest financial crisis since the Great Depression was the enactment of stress testing for our nation’s largest banks. H.R. 4293 would make several harmful changes to the current bank stress test regime, specifically the stress tests required by the Dodd-Frank Wall Street Reform and Consumer Protection Act as well as the Comprehensive Capital Analysis and Review (CCAR) program administered by the Board of Governors of the Federal Reserve System.”

This legislation passed the House Financial Services Committee on a 37-21 vote and has the support of two cosponsors, both of whom are Democrats.

Media:

• House Financial Services Committee Press Release
  
• CBO Cost Estimate