Banks’ Risks During the Pandemic Aren’t Clear
The Fed’s stress tests didn’t publish the results needed most to understand the financial sector’s ability to endure coronavirus.
Banking is different now.
Photographer: Cindy Ord/Getty Images
Transparency and public trust are essential to effective bank regulation. These guiding principles were severely compromised in the years leading up to the 2008 financial crisis. Instead of simple, straightforward metrics of bank solvency, capital requirements became an exercise in gamesmanship. Regulators deferred to banks’ own opaque and incomprehensible models of risk to determine how much capital they needed, deeming them “well-capitalized” when the banks were anything but. Reforms adopted after the crisis wisely added simpler, objective capital standards, complemented by stress tests that publicize whether large banks have sufficient capacity to weather severe economic conditions.
Unfortunately, last month’s confusing and vague pronouncements by the Federal Reserve of this year’s stress test results undermined those principles. Instead of reassuring the public, they have created more uncertainty as to the strength of the banking system.