James Love: “When it comes to bank regulation, the job of the regulator is to balance the need for economic growth with the safety…”

“When it comes to bank regulation, the job of the regulator is to balance the need for economic growth with the safety and soundness of the financial system. With fresh memories of the most recent financial crisis, it is natural for regulators to err on the side of being overly cautious so they aren't blamed when something goes wrong. Unfortunately, this has led to a situation in which regulators are evaluating stress tests based on subjective and unclear standards. The stress tests are opaque; it is like asking banks to kick a field goal when they don't even know where the goal posts are. What is more, the regulators keep ratcheting up the standards. For the stress tests to achieve their goal, however--the goal of keeping the financial system safe and sound--they need to be transparent and they need to be fair. H.R. 4293, a bill with bipartisan support, would approve the stress testing process for bank holding companies by repealing the ability of regulators to reject a financial institution's stress test based on subjective and opaque standards. Another important improvement to the process would be the elimination of the overly burdensome midcycle review by shifting from biannual to annual stress testing requirements. These reforms would make it easier for Congress, the markets, and the public to assess both the integrity of the findings of the stress tests and the effectiveness of the Fed's regulatory oversight.…”