Fed creates council to study stress tests

THE FEDERAL RESERVE - chairman Ben S. Bernanke picture above - created an advisory council of economists to help evaluate the models used in so-called stress tests judging banks predicted performance in a poor economy.
Posted 4/20/12

WASHINGTON - The Federal Reserve created an advisory council of economists to help evaluate the models used in so-called stress tests judging how banks would perform in a poor economy.

The Model Validation Council will provide the Fed “expert and independent advice on its process to rigorously assess the models used in stress tests of banking institutions,” the central bank said in a statement today in Washington.

“The council is intended to improve the quality of the Federal Reserve’s model assessment program and to strengthen the confidence in the integrity and independence of the program.”

U.S. regulators, empowered by the Dodd-Frank Act and criticized for not averting the crisis in mortgage finance, have redesigned their approach to bank supervision, focusing more on systemic risk.

They seek to prevent a repeat of the financial crisis that led to the collapse of Lehman Brothers Holdings Inc. in the largest bankruptcy in U.S. history.

The central bank last month released the results of stress tests showing that 15 out of 19 banks would be able to maintain capital levels above a regulatory minimum in an “extremely adverse” economic scenario, even while continuing to pay dividends and repurchasing stock.

Those results were due to scrutiny by the Fed on capital payouts over the past three years, the central bank said.

Citigroup Inc., SunTrust Banks Inc., Ally Financial Inc. and MetLife Inc. failed to meet some minimum standards in the tests.

Committee of Economists

The committee will be led by Francis X. Diebold, an economics professor at the University of Pennsylvania.

The panel will also include Peter Christoffersen, of the University of Toronto; Mark Flannery, from the University of Florida; Philippe Jorion, from the University of California at Irvine; Chester Spatt, from Carnegie Mellon University; and Allan Timmermann, from the University of California at San Diego.

The Fed also released a list of answers to frequently asked questions that arose during the recent round of stress testing, covering topics including methodologies to project losses for mortgages and other consumer portfolios, mortgage repurchase risk and wholesale portfolios.

The central bank will hold a symposium on the models used in stress tests at the Federal Reserve Bank of Boston on Sept. 13 and 14.

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