Fed forms academic panel to assess bank stress test program

Francis X. Diebold

In response to criticism from several financial institutions, the Federal Reserve named six academics last Friday to a panel that would provide a thorough assessment of stress tests conducted at banks and other firms.

Francis X. Diebold, an economics professor at the University of Pennsylvania, will serve as the council’s chairman. Other panel members named include Peter Christoffersen of the University of Toronto, Mark Flannery of the University of Florida, Philippe Jorion of the University of California – Irvine, Chester Spatt of Carnegie Mellon University and Allan Timmermann of the University of California – San Diego, Fox News reports.

The “Model Validation Council” was formed following the Fed’s recent release of bank stress test results mandated under the 2010 Dodd-Frank Act. The central bank said in a statement that the panel was formed to assess and improve the quality of and renew confidence in the stress test program. The Fed also released a document that addresses questions from banks related to the methodologies and processes used in the stress tests.

After the Fed released the results of stress tests conducted on 19 large financial corporations, many of the banks criticized the results. Some of the institutions that failed the stress tests said that the Fed’s scoring system complicates approval reapplication to raise dividends or buy back stock. Other institutions deemed sound after the tests questioned the disparity between their capital estimates and the Fed’s, according to Fox News.

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