THE FED CALLED ITS OWN FLAWS ‘A FEATURE, NOT A BUG’ — NOW IT PUBLISHES THE MODELS AND HALVES THE STRESS-TEST SWING

Bank stress tests are the fire drill for the money that holds your paycheck. After Silicon Valley Bank blew up in 2023, the drill was supposed to catch the next one early. Friday, in the marble of Mansion House in London, the Fed’s top bank supervisor Michelle Bowman previewed rules the Board will finalize in the coming weeks and put in force for the 2027 test. The Fed will publish its models — “the equations, variables, coefficients, underlying assumptions” — the same kind of secrecy the Board once “considered… to be a feature, not a bug.” And the binding capital number will now come from “averaging the results of a bank’s two most recent annual stress tests,” a change she says will “reduce SCB volatility by half without materially changing aggregate levels of required capital.”

Be fair: she is not cutting headline capital, and she wants more scenarios to spot trouble sooner. But hear what averaging does. It blends the year a bank flunks with the calmer year before and cuts the swing in half. Bowman herself says a plausible scenario “would have shown the firm’s capital falling below minimum required levels as early as the fourth quarter of 2021” — more than a year before SVB failed. The referees who missed that are now handing the banks the answer key and easing the rules they grade banks by. You cannot audit their models. You can hold your own keys. At the time of this writing, bitcoin was $80,783.