US stress tests: 'serious concerns remain' warns Congress

Congressional investigators warn bank stress tests not enough

WASHINGTON, DC - Congressional investigators have released their report into the bank stress tests conducted by the US Treasury and Federal Reserve earlier this year, saying the exercises were solidly based but that "serious concerns remain".

The Congressional Oversight Panel's 164-page report, 'Stress testing and shoring up bank capital', makes a number of recommendations as a result of studying the methods used in the tests.

The panel, created to oversee the spending of $700 billion in Troubled Assets Relief Program funds, says although the methods used were "conservative and reasonable", the worst-case scenario - designed as the baseline for recapitalisation - did not go far enough.

The report says the increase in US unemployed to 9.4% in May meant the assumed 2009 rate of 8.9% used in the tests' most adverse scenario had been called into question, potentially necessitating a further recapitalisation of US banks.

The panel says economic factors such as the unemployment rate, coupled with banks' continuing tenure of toxic or illiquid assets, mean a reappraisal is necessary, leading to further tests by the federal authorities and internal exercises by the banks for disclosure.

Ten US banks failed Treasury secretary Timothy Geithner's stress tests, requiring a combined $74.6 recapitalisation when the results were published in May. This possibly influenced decisions by the UK Financial Services Authority and the Committee of European Banking Supervisors to adopt a different method for their own banking stress tests, keeping the results secret.

The role of stress tests in US regulation is set to increase. The report suggests regulators make more use of them to promote and maintain financial stability, and prevent systemic risk.

With this in mind, it seems possible the new systemic risk body touted for creation by the Obama administration, which would be composed of Treasury, Federal Reserve and other regulatory representatives, might be responsible for future industry-wide stress tests.

The Congressional Oversight Panel's report can be read in full here.