Stress Tests Restrict Hometown Businesses' Access to Capital

Businesses of all sizes depend on the financial support banks offer to launch, expand, and innovate. However, banks face an unsustainable and unclear regulatory landscape as the Federal Reserve administers opaque stress tests that restrict a bank's ability to provide loans to your hometown businesses. 

Annually, the nation's largest banks are subject to rigorous evaluations known as stress tests. Mandated by the Dodd-Frank Act, these assessments are designed to gauge banks’ resilience and capacity to remain stable when facing a significant economic downturn. The stress test functions as a regulation but does not adhere to the Administrative Procedure Act, a law specifically designed to improve regulations through transparency and public comment. The Federal Reserve’s process for administering stress tests is opaque, which creates uncertainty for banks to navigate and remain compliant. For example, the Federal Reserve does not publish the models for the stress tests. 

The Federal Reserve’s stress tests have become a direct determinant of how much capital banks must hold. If banks do not score well on the test, they are required to retain additional capital. If banks have to hold more capital, they have less available to lend to hometown businesses and consumers, making capital even more expensive. Even the Federal Reserve Bank of Cleveland acknowledged that banks most impacted by stress tests tend to shift small business lending from high-risk to safer markets, often increasing interest rates for small businesses.  

The Chamber has long advocated for the protection of Main Street lending. In 2018, the Chamber sent a letter to the Federal Reserve, urging that the stress testing scenarios and models should be subject to the public notice and comment process required by the Administrative Procedure Act.  

The unlawful stress testing requirements imposed on banks negatively impact our local communities and economies by locking up capital that could otherwise fuel new and existing businesses of all sizes. The uncertainty and financial strain caused by the current stress testing regime is ultimately borne by people in the real economy, like aspiring entrepreneurs and consumers supporting local businesses.

The Federal Reserve should make the stress test models and scenarios available for public notice and comment to maintain a transparent regulatory environment that fosters economic growth.