Former FRB Vice Chair Quarles Questions Legality of Current Stress Tests

Former Federal Reserve Board ("FRB") Vice Chair for Supervision Randal Quarles argued that the regime currently used by the FRB to conduct stress tests is "illegal."

In remarks before a SIFMA roundtable (at transcript pages 33-4), Mr. Quarles made clear that while he "strongly agrees with the concept of stress testing," he has become "convinced that the way the stress test is conducted now is a violation of the Administrative Procedure Act. It is illegal." Mr. Quarles said that he "worr[ies] now, with the further interaction of the improperly, illegally run stress test with the extreme upward calibration of the through-the-cycle capital requirements, that that may be more than illegal."

Mr. Quarles's comments followed a speech delivered by FRB Vice Chair for Supervision Michael Barr, who described the current stress testing process as "generally sound". Mr. Barr emphasized the importance of implementing the changes to risk-based capital requirements (also known as the "Basel III Endgame") (see previous coverage).