Board of Governors of the Federal Reserve System

I want to thank the staff for their hard work on this final rule. There are aspects of the rule that I support. For example, I have long supported using multiple scenarios for the global market shock and taking into account the larger of the losses from these scenarios, as the final rule provides. I am also encouraged by indications that supervision will use multiple non-binding scenarios to evaluate individual firm and system-wide risk, as I have long advocated.

Nonetheless, largely for the reasons I laid out in detail in my dissent at the proposal stage, I cannot support the final rule. Over time, the rule will reduce the dynamism, rigor, conservatism, and credibility of the stress test and thus undermine financial stability.

Disclosure of the stress test models and annual public comment processes on model changes and scenarios will make the stress tests less responsive to emerging risks. Calcified models will also allow banks to optimize their balance sheets to the test, rather than focusing on underlying risk. Using the same models, which will drive all banks toward the same risks, could increase concentrated risks in the financial system—as we saw in the Global Financial Crisis when financial institutions treated mortgage-backed securities as safe and liquid assets, helping to bring the financial system to its knees. A number of the models themselves have already become less conservative through the process to date and there is a large risk that they will continue to be watered down over time. New restrictions on scenario design and annual procedures will also hamper the ability of scenarios to test for novel or emerging vulnerabilities.

These stress test changes come on top of other measures that are reducing the resilience of the financial system: fostering a global race to the bottom on overall capital requirements under Basel III, reduced GSIB surcharges, reduced leverage ratios, cuts to supervisory staff, and supervisory operating procedures that make it harder for supervisors to hold banks accountable for fixing their problems, to name a few.

In sum, the final rule will significantly weaken the stress test and consequently, bank resilience. I have deep concerns that these changes will result in reliance on a stress test that lacks credibility and can no longer effectively assess the capital adequacy of the largest banks, thus putting our financial system and economy at risk.