A watchdog group today called the tests "helpful," but cautioned that there are still "unanswered questions."
The day after the Federal Reserve approved plans submitted by 10 of the country's 19 biggest banks to raise more capital as a result of the government's stress tests, a watchdog group called the tests "helpful," but cautioned that there are still "unanswered questions."
To assess the usefulness of the stress tests, the Congressional Oversight Panel recently consulted with two experts -- University of California at Berkeley professors Eric Talley and Johan Walden -- and found positive reviews overall.
"Based on the available information, the professors found that the Federal Reserve used a conservative and reasonable model to test the banks, and that the model provides helpful information about the possible risks faced by [bank holding companies] and a constructive way to address those risks," the panel said in its new report, which is to be released today.
But Talley, a law professor, and Walden, who teaches at Berkeley's Haas School of Business, did voice "some serious concerns," the panel said.
"They noted that there remain unanswered questions about the details of the stress tests," the panel said in its report. "Without this information, it is not possible for anyone to replicate the tests to determine how robust they are or to vary the assumptions to see whether different projections might yield very different results.
"There are key questions surrounding how the calculations were tailored for each institution and questions about the quality of the self-reported data," the COP report said.
One issue is that the stress tests only used economic projections dating to the end of next year.
"While this time frame avoids the greater uncertainty associated with any projection further in the future, it may fail to capture substantial risks further out on the horizon," the watchdog group warned.
So, the panel suggested in its 50-page report the government should conduct the stress tests again if economic conditions warrant.
"Regulators should have the ability to use stress tests in the future when they believe that doing so would help to promote a healthy banking system," the panel said.
For example, if the nation's unemployment rate -- currently at a 25-year high of 9.4 percent -- continues to rise for the rest of the year, then it will likely surpass the government's adverse stress test scenario of an 8.9 percent average for 2009, rendering the stress tests obsolete.
Or, the panel said, if banks continue to keep "a large amount" of toxic assets on their balance sheets, then more tests would help.
Also, the panel added, "Between formal tests conducted by the regulators, banks should be required to run internal stress tests and should share the results with regulators."
Elizabeth Warren, the panel's chairwoman and the Leo Gottlieb Professor of Law at Harvard University, will head to Capitol Hill this morning to testify on the report before the Joint Economic Committee.
Meanwhile, the panel's lone sitting member of Congress called Monday for the $700 billion Troubled Asset Relief Program to be terminated within six months, noting that as a result of the stress tests, the 10 banks can now raise additional capital either in the private markets or simply by using the remaining bailout funds at the government's disposal.