In hearing, top Fed supervisor deflects plea to eschew publication of stress-test scenarios

Randal Quarles, Federal Reserve Board vice chairman for supervision, responds to questions from House Financial Services Committee members Tuesday.

The Federal Reserve Board’s vice chairman for supervision, urged in a hearing against publishing supervisory stress-test scenarios for banks, told lawmakers that the Fed’s decision will take into account all the comments received on a related Fed proposed rule.

Quarles was answering a question from Rep. David Scott (D-Ga.) during a House Financial Services Committee hearing Tuesday where he was delivering semiannual testimony on the Fed’s supervision and regulation.

Scott said he “couldn’t disagree more” with Quarles’ assertion that stress-test scenarios should be published since that would make it possible for a bank to “optimize its balance sheet” the day of the stress test. “You can’t let the cat out of the bag before its time … to get the fair adjustment,” Scott said.

The Fed last December proposed a rule to increase the detail in the Fed’s disclosures regarding its stress test models. The enhanced disclosures, as proposed, have three components: (1) enhanced descriptions of supervisory models, including key variables; (2) modeled loss rates on loans grouped by important risk characteristics and summary statistics associated with the loans in each group; and (3) portfolios of hypothetical loans and the estimated loss rates associated with the loans in each portfolio.

Comments on this proposal closed in January.

“We are continuing to think about how we can make the stress testing process more transparent without lowering the strength of the test itself or undermining the usefulness of the supervisory stress test,” Quarles said in prepared testimony. “I personally believe that our stress testing disclosures can go further, and that we should consider additional measures, such as putting our stress scenarios out for comment. My colleagues and I on the Board will be paying particularly close attention to comments on how we might improve the current proposal.”

Quarles fielded questions a wide range of topics during Tuesday’s hearing, among them the growth (and role) of fintech and the financial system’s cyber resilience.

During further questioning from Scott, Quarles agreed that fintech offers possibilities for enhancing services to underserved areas. Speaking to Rep. Ann Wagner (R-Mo.), he assured that the Fed is working with other federal and private regulatory bodies – the Financial Stability Oversight Council (FSOC), Federal Financial Institutions Examination Council (FFIEC) and the Financial Services – Information and Analysis Center (FS-ISAC) – on how to help ensure the financial system’s cyber resiliency.

April 17, 2018, Testimony by Federal Reserve Board Vice Chairman for Supervision Randal Quarles

Enhanced Disclosure of the Models Used in the Federal Reserve’s Supervisory Stress Test (December 2017)