Home > finance > Neil Barofsky on the Fed Stress Test

Neil Barofsky on the Fed Stress Test

October 10, 2012

I recently started using Twitter, and I only follow 8 people, one of them being Neil Barofsky, author of Bailout, which I blogged about here (Twitter is a useful way to stalk your crushes, as Twitter users already know).

I’m glad I do follow him, because yesterday he tweeted (twatted?) about an article he wrote on LinkedIn which I never would have found otherwise. It’s called “Banks Rule While the Rest of us Drool,” and he gave credit to his daughter for that title, which is crushworthy in itself. It’s essentially a bloggy rant against a Wall Street Journal article which I had just read and was thinking of writing a ranty blog post against myself.

But now I don’t have to write it! I’ll just tell you about the WSJ article, quote from it a bit (and complain about it a bit since I can’t help myself), and then quote Barofsky’s awesome disgust with it. Here goes.

The Fed conducts stress tests on the banks, and they are making them secret, so the banks can’t game them, as well as requiring more frequent and better quality data. All good. From the WSJ article:

The Fed asks the big banks to submit reams of data and then publishes each bank’s potential loan losses and how much capital each institution would need to absorb them. Banks also submit plans of how they would deploy capital, including any plans to raise dividends or buy back stock.

After several institutions failed last year’s tests and had their capital plans denied, executives at many of the big banks began challenging the Fed to explain why there were such large gaps between their numbers and the Fed’s, according to people close to the banks.

Fed officials say they have worked hard to help bankers better understand the math, convening the Boston symposium and multiple conference calls. But they don’t want to hand over their models to the banks, in part because they don’t want the banks to game the numbers, officials say.

Just to be clear, when they say “large gaps”, I’m pretty sure the banks mean they are perfectly safe when the Fed thinks they’re undercapitalized. I am pretty sure the banks are arguing they should be giving huger bonuses to their C*O’s whereas the Fed thinks not. I’m just guessing on the direction, but I could be wrong, it’s not spelled out in the article.

Here’s another thing that drives me up the wall, from the WSJ article:

Banks say the Fed has asked them for too much, too fast. Some bankers, for instance, have complained the Fed now is demanding they include the physical address of properties backing loans on their books, not just the billing address for the borrower. Not all banks, it turns out, have that information readily available.

Daryl Bible, the chief risk officer at BB&T Corp., a Winston-Salem, N.C.-based bank with $179 billion in assets, challenged the Fed’s need for all of the data it is collecting, saying in a Sept. 4 comment letter to the regulator that “the reporting requirements appear to have advanced beyond the linkage of risk to capital and an organization’s viability,” burdening banks without adding any value to the stress test exercise. BB&T declined further comment.

Oh really? Can you, Daryl Bible, think of no reason at all we might want to know the addresses of the houses you gave bad mortgages to? Really? Do you really think you deserve to be a Chief Risk Officer of a firm with $179 billion in assets if your imagination of how to calculate risk is so puny?

But the most infuriating part of the article is at the end, and I’m going to let Neil take it away:

… at the end of the article the reporters reveal that the Fed recently “backed off” a requirement that the CFOs of the banks actually confirm that the numbers they are providing are accurate. The reason?  The banks argued, and the Fed apparently agreed, that providing data about what’s going on in the banks is simply too “confusing for any CFO to be able to be sure his bank had gotten it right.” In other words, rather than demand personal accountability, the Fed seems to be content with relying on unverified and potentially inaccurate data.   If this does not prove both the inherent unreliability of these tests and that the banks are still so hopelessly complex that their executives do not know what’s going on inside of them (See Whale, London), I’m not sure what would.

Categories: finance
  1. papicek
    October 11, 2012 at 10:36 am

    I was twitter-skeptic for years, now I find it indispensable. The key, I find, is following good people, who tweet a lot and have something substantive to share. No different than blogging.


  2. Sam the Cat
    October 12, 2012 at 8:57 pm

    Dear Ms, O’Neil – Please review Mr. Bible’s comment letter to the Fed (see link below).

    It is actually very reasoned and serves/seeks to improved the data quality and information flows between the SIFIs and their prudential regulator.

    Mr. Bible is also the Chief Financial Officer, as opposed to the Chief Risk Officer as reflected in your post. I was surprised by your comments about him vis-a-vis BB&T’s lending practices as that institution has a very decent reputation as a prudent lender.

    Please consider reading the cooment letter and perhaps researching BB&T with regards to its reputation as a lender. You may feel differently about both and even cosider editing your post.

    Sincerely – rr

    Click to access ICP-201211_090412_108287_315985915837_1.pdf


  1. April 9, 2013 at 3:52 am
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