WASHINGTON (MNI) – The following is the third and final section of
thetext of Federal Reserve Gov. Daniel Tarullo’s remarks Friday evening
to the International Research Forum on Monetary Policy:

A second option would be to provide details about the assumptions
and methods supervisors employed in the stress tests but withhold public
release of results for individual banks. This practice could be coupled
with a requirement for more systematic, timely, and consistent
disclosure by the largest banks of information on material firmwide risk
positions and exposures, funding and liquidity profiles, operating
performance, and other measures. Like the first approach, this option
would have the benefit of opening supervisors methods to discussion. By
increasing the disclosure of banks risk exposures, this approach would
also enhance market discipline, as market participants could make their
own forward-looking assessments of banks conditions.

(Daniel K. Tarullo (2010), “Equipping Financial Regulators with the
Tools Necessary to Monitor Systemic Risk,” statement before the
Subcommittee on Security and International Trade and Finance, Committee
on Banking, Housing, and Urban Affairs, U.S. Senate, February 12,
www.federalreserve.gov/newsevents/testimony/tarullo20100212a.htm.)

However, some benefit would be lost, since the information from
individual banks would not have been standardized or verified by
regulators. Concomitantly, while the risk of an In addition, it would be
important to assure that the routine release of selected supervisory
information did not undermine our ability to maintain the
confidentiality of other supervisory information. overreaction to the
release of information would still exist, there would be no single
number on which market participants could focus.

A third possibility would be to have supervisors release aggregate
results of their horizontal, forward-looking assessments, along with
details about their assumptions and methods, without requiring
additional disclosure by firms. This approach could still confer
considerable benefits by providing information to the public about the
overall condition of the banking system as well as about supervisory
methods. It has, in fact, been applied by Japans Financial Services
Agency (FSA), which conducted a special bank inspection in 2002 and
2003, when Japanese banks were still recovering from a crisis. The FSA
publicly released aggregate results showing the differences between the
banks and the FSAs assessments of loan quality, which showed that the
FSAs assessments were more stringent than the banks. Many of the major
banks subsequently increased their loan loss reserves, and the
inspections appeared to increase confidence in the banking system. Of
course, the informational benefit to market participants could be
substantially diluted if they are unable to distinguish the conditions
of individual firms as reflected in the aggregate numbers.

Conclusion

To conclude, you should now have a sense of the degree to which our
experience with SCAP experience has informed changes in our supervision
of large institutions as part of the broader enterprise of regulatory
reform. As to the issue of stress test transparency, I look forward to
hearing how others assess the merits of the alternative approaches I
have described and, of course, any new ideas.

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** Market News International Washington Bureau: 202-371-2121 **

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