STRESS TESTS - A GOVERNANCE MECHANISM?

I had yesterday the good fortune to hear Professor Andrew Mullineaux speak about US BHC stress tests. He essentially said these are corporate governance exercises. And he is right. To the extent that additional BHC capital levels rise, the risk of a tax payer bailout declines. To the extent that loss absorbing securities are issued, the risk of loss to the tax payer declines too. Professor Mullineaux pointed to yesterday's FT article and rightly explained that fortifying the stress test regime was in essence a corporate governance negotiation, as loss sharing rules where being determined.

Now we learn that the Fed's leading banking authority, Daniel Tarullo, is calling for a surcharge on SIBs. Other Fed officials are indicating that such moves are designed to fully internalise risk within BHCs, which means expected and some portion of unexpected losses may be covered by capital. These surcharges, which may go beyond Basel determined levels, is another example in my eyes of US authorities really wanting to lead the way and get out in front of increasing capital buffers and risk governance abilities of US banks relative to European challengers.  Such rules may kick in as soon as 2018/19, let's see. One thing is for sure, US BHCs continue to be subject to a whole host of test levels that the Europeans would dread given where the are as of today.