UPDATE 1-Fed's Tarullo sees benefits in stress test disclosure

Fri Mar 26, 2010 6:10pm EDT

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By Pedro Nicolaci da Costa

WASHINGTON, March 26 (Reuters) - Public disclosure of bank stress test results last year helped rescue the global financial system, and regulators should weigh some level of transparency in future tests, the Federal Reserve's leading figure on regulation said on Friday.

Daniel Tarullo, a member of the Fed's Board of Governors and its chief point person on regulatory issues, credited the financial stress tests as restoring confidence in a teetering banking sector.

"The public release of the results played an important role in stabilizing the financial system," Tarullo said at a monetary conference sponsored by the U.S. central bank.

Congress is considering various versions of financial regulatory reform, some of which might reduce the Federal Reserve's role over policy. Many fault the Fed for loose oversight that allowed dubious practices in both banking and housing to thrive, leading to the financial crisis.

But Tarullo argued the Fed has reformed its ways, fine-tuning the way it supervises banks to include possible risks to the system as a whole, looking beyond the individual conditions of specific institutions.

As for releasing future stress test results, Tarullo cited pros and cons. One risk would be that fears about potentially troubled banks might be self-fulfilling.

"The revelation that some major banks may have capital needs under a stress scenario might be unnecessarily destabilizing," Tarullo said.

At the same time, the importance of transparency to functional markets suggests some level of disclosure is not only possible but also desirable.

One option might be to "provide details about the assumptions and methods supervisors employed in the stress tests but withhold public release of results for individual banks." (Editing by Leslie Adler)

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