– The author is a Reuters Breakingviews columnist. The opinions expressed are his own –
By Rob Cox
NEW YORK, April 6 (Reuters Breakingviews) – Improving U.S. bank regulation may call for a little more stress. The disclosure and discipline imposed by the Federal Reserve’s stress tests of big banks a year ago drew a line under the crisis. The tests separated sheep from goats and led to tens of billions of dollars of new capital being raised. It’s a shame that stress tests aren’t becoming an annual event.
The tests have been overshadowed by the Troubled Asset Relief Program. After all, that $700 billion plan to recapitalize the banking system kept institutions like Citigroup, Bank of America and Morgan Stanley from going under. But the TARP scheme was fraught with conflicts still bedeviling the debate over reform, including the problem of bankers paying themselves handsomely on the back of taxpayer bailouts. As a result, few are calling for a repeat of the TARP experience.
But the Fed’s stress tests have turned out well. The central bank-led analysis of 19 financial companies last April compared their capital strength on a consistent basis across the industry. That, in turn, led to the formation of some $185 billion of new private banking capital, priced accordingly. It also set a precedent for much-needed interagency cooperation on regulation.
Despite the success of the Supervisory Capital Assessment Program, as the scheme was called, neither of the financial reform bills wending their respective ways through the House of Representatives and the Senate argues for making stress tests an annual tradition. That’s a shame.