Stress tests that the United States conducted on its banks last year show releasing the results of such tests can be a calming force for markets, a senior Federal Reserve Bank of New York staffer said on Monday.
Simon Potter, director of economic research at the New York Fed, told a Connecticut Bank and Trust Company economic outlook breakfast that the U.S. tests proved to be confidence-enhancing and served to make banks 'investable' again.
Under certain circumstances transparency about the methods used and a willingness to commit to disclosure of the results by public authorities can be a calming force, he said in his prepared remarks.
But he said the credibility of the stress tests was dependent on the Treasury's Capital Assistance Program being available to provide capital if markets were unable to do so.
Potter's remarks come as Europe is grappling with whether to publicly disclose its own stress tests. Top European Central Bank officials said over the weekend that Europe is close to completing stress tests on its banks to gauge their ability to withstand a market slump, and the results should be published to help restore market conference.
In a speech tackling lessons from various phases of the financial crisis, Potter said bank regulators made a tactical misstep by failing to force banks to raise high-quality capital early in the crisis.
But he said as the crisis intensified, the Fed and other government agencies' ability act with speed and flexibility was vital to stabilizing the system.
While the global financial crisis also highlighted the need for banks to hold high-quality buffers, it did not give a definitive indication of how big these buffers have to be.
While the financial crisis has taught us that financial institutions need high-quality common equity capital to absorb losses ... it has not given any definitive indication of how much larger the capital buffers of financial institutions need to be to assuage worries about future tail events that can drive panics, he said.