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June 27, 2024

WATCH: In Hearing, Pressley Underscores Need for Strong Banking Regulations, Rigorous Stress Testing

Pressley Pushes Back Against Republican Proposals to Deregulate and Undermine Bank Stress Testing

“When implementing stress tests, regulators should be prioritizing what is best for consumers and the stability of our financial system, not the desires of greedy bank CEOs.”

Video (YouTube)

WASHINGTON – In a House Financial Services Committee hearing, Congresswoman Ayanna Pressley (MA-07) underscored the need for strong financial regulations, including rigorous stress testing to ensure proper oversight of banks and decrease the risk of economic harm to consumers. Congresswoman Pressley specifically criticized Republican attempts to weaken regulations and publicly reveal the mechanics behind stress testing, which would help banks circumvent oversight.

A transcript of Rep. Pressley’s line of questioning is available below and the full video is available here.

Transcript: In Hearing, Pressley Underscores Need for Strong Banking Regulations, Rigorous Stress Testing

House Committee on Financial Services

June 26, 2024

REP. PRESSLEY: Thank you Mr. Chair and thank you to our witnesses for joining us today. 

The 2008 Financial Crisis exposed the weaknesses and vulnerabilities in our financial system, causing a recession that robbed an entire generation of economic opportunity and many are still reeling from these effects. 

The modern stress testing regime that regulators use today was born out of that crisis and is now a staple of our regulatory framework and oversight of banks. 

My Republican colleagues, however, want to go beyond the rollback of Dodd-Frank in 2018 that directly led to the collapse of SVB and other banks last year. They want to continue down a path of deregulation that will undoubtedly increase systemic risk in our financial system and increase economic harm to our constituents. 

Make it make sense.

Mr. Feldberg, how did regular stress testing restore confidence in the banking sector following the 2008 Financial Crisis?

MR. FELDBERG: So in the middle of the financial crisis, there was widespread concern about the capital of all the largest banks in the U.S. And I think there was just a lack of belief in regulatory capital information that was out there.

There was a lack of confidence in the measure of capital. So the point of the stress test was to throw a very difficult scenario at the banks and to ask the question, what would happen if this thing even got even worse than it is? 

I think it was seen as a very credible test. So the important thing really was that it be seen as credible by the markets. And the results showed some banks pass, some banks fail.

Banks went ahead and raised capital in an environment in which confidence was improving. My guess there was some luck that they were able to raise capital and only a small number of banks ended up really failing the test. 

But it was a remarkable opportunity to address the crisis and get it going — and get things going again.

REP. PRESSLEY: Thank you. You know, again, deregulation is a failed approach. Yet bank lobbyists are continuing to push for less stringent oversight. 

My colleagues across the aisle are working with big banks to publicly reveal the mechanics behind stress testing. This is not a pro-transparency, good governance argument. They simply want to help banks game the system and circumvent oversight.

Mr. Feldberg, in 2019, the Fed provided details to banks about how they conduct stress tests, and this diminished the value of those tests. 

If the Fed reveals even more information, just building upon what we’ve been talking about today, please expound: wouldn’t that allow banks to essentially game the tests, undermining the very purpose of examining how resilient and prepared banks are for unexpected shocks to the financial system?

MR. FELDBERG: The banks spend a great deal of money trying to reverse engineer the stress test and don’t think they do that for any other reason than trying to game the process. 

They can already do a pretty good job of reverse engineering because they already get more information about the stress test models than any other country gives their banks. 

If they got what’s being asked for today, it would emasculate the process and we’d have something similar to what OFHEO had with the GSEs, an ineffective process that doesn’t keep up with changes in the financial system.

REP. PRESSLEY: Thank you.

MR. FELDBERG: I’d like to – I mean, just, an argument that came up earlier was why don’t we reveal these things after the test and I would discourage that idea from going much further. 

As I keep on saying we actually do disclose a great deal already. So the difference in what we would be disclosing after and before the release of the results isn’t very much but it is that one little secret sauce that prevents the banks from essentially just replicating the models and baking grandma’s cake and then there’s, you know, you don’t have a test anymore.

REP. PRESSLEY:  Thank you. When implementing stress tests, regulators should be prioritizing what is best for consumers and the stability of our financial system, not the desires of greedy bank CEOs.  

If Republicans and big banks want greater transparency, then they should practice what they preach. 

I have a long list of areas where banks should be more transparent: the use of AI in decision-making, their investments in mass incarceration, the funding of fossil fuel projects that kill our environment, the denials of mortgages and business loans to disproportionately Black and brown communities, and so much more.

The Fed should not give away the answer key to stress testing.   

After witnessing some of the largest bank failures in our history last year, our response cannot be further deregulation that weakens our banking system. We need meaningful and stringent stress tests for a safer and more stable financial system.

Thank you, I yield.