US stress tests: The Federal Reserve’s latest stress tests mark another important step in the rehabilitation of America’s banks. Several are to be allowed to increase their dividends and even resume buying back stock — JPMorgan, US Bancorp and Wells Fargo had already announced by midday on Friday that they are doing both, and Goldman Sachs later said it would buy back the $5 billion of preferred stock Warren Buffett acquired at the height of the crisis. Getting the Fed’s clearance for these moves is a welcome development. But it would be even more powerful if the Fed were to go the extra mile and provide much more detail on both its methodology and the results.
As it stands, the central bank seems to be sticking to the letter of the law. Last year’s Dodd-Frank Act stipulated that the Fed oversee such check-ups annually. But the law sketched out the barest of requirements on the economic scenarios regulators should test for and only required that the Fed publish a summary of its findings.
That’s in stark contrast to the detailed analysis published in the first stress tests at the height of the crisis two years ago. That was the deciding factor in overcoming the market’s initial skepticism about the tests. Being able to see how a variety of banks fared when subjected to the same adverse scenarios ultimately helped stabilize trading in their stocks and debt and gave investors confidence enough to pour some $200 billion of new capital into the financial sector.
Regulators need not, and should not, keep such transparency in reserve for a crisis. After all, they have far more access to information on banks' leverage, loan portfolios and lending and investing criteria than shareholders do. That means they are better positioned to spot potential excesses and lax risk management.
Revealing more about a thorough analysis of their charges once a year wouldn't just help give investors confidence that the banking system is on an even keel. It would also show the public that the regulators are on the case. After their collective failings before and during the crisis, that would be a useful boost for confidence, too.