U.S. Sen. Elizabeth Warren (D-MA) expressed concerns that the Federal Reserve Board’s proposed stress tests rule would weaken the stress capital buffer (SCB) framework.
In a letter to the Fed, Warren said the proposed rule would allow big banks to “juice” payouts to shareholders at the expense of financial stability. Further, Warren said it would increase the likelihood of big bank failures.
“The proposed rule is yet another example of the Fed’s looking out for Wall Street executives and shareholders at the expense of the American public,” Warren, ranking member of the Senate Banking, Housing, and Urban Affairs Committee, wrote. “It would weaken the stringency of the Fed’s stress testing framework and reduce loss-absorbing capital levels at the largest banks in the country – making the banking system more fragile at a moment when President Trump’s chaos has the economy on the brink. It should be withdrawn, and the Fed should abandon its broader tear down of the stress testing regime.”
Warren added that a real-world financial shock does not provide big banks with a heads-up and advanced certainty on losses – and nor should the stress tests. With more certainty, firms will be less cautious and more aggressive in increasing their dividends and buybacks, thus depleting their capital.
“The public relies on a stable banking system to finance homes, cars, and businesses. This proposed rule, like many others promulgated by the Trump Administration, increases the likelihood of another financial crash and more Wall Street bailouts. The Fed should withdraw this proposed rule and end its assault on Wall Street safeguards,” Warren wrote.