Disclosure of Banks’ Stress-Test Results

The Dodd-Frank Act requires that the Federal Reserve conduct an annual stress test on large bank holding companies (BHCs) to ensure they have sufficient capital to withstand losses from adverse economic conditions. Eighteen BHCs were subjected to a stress test this year. The stress tests operate on the assumption that providing more information will help impose more discipline on financial institutions. However, the policy of disclosure has some significant disadvantages that need to be addressed in order for financial regulation to be effective.