FAQ: The Story Behind the Tarullo-CEOs Meeting on Stress Tests

WASHINGTON — Federal Reserve Board Gov. Daniel Tarullo is set to meet Wednesday in New York with the top executives of several large banks, many of whom are still smarting over the central bank's recent stress tests.

Tarullo, who heads bank supervision for the Fed, has indicated the agency is open to making changes in the next go around, but many bankers are still seeking details about the central bank's current methodology.

The meeting has become the latest flashpoint in an ongoing battle between the Fed, which views the stress tests as a necessary way to evaluate banks' future capital plans, and banks, who openly doubt the Fed's calculations.

We offer the following frequently asked questions about what the meeting means, what is likely to be discussed, and where banks go from here.

How did this meeting come about?
Shortly after the Fed released the results of the last round of stress testing in March, regulators agreed to meet with JPMorgan Chase & Co. and other institutions to discuss the exercise. Banks were confused — and in some cases, angry — about the results because their internal models did not match up with the Fed's calculations. The discrepancy has raised a number of questions on what models the central bank used to score each institution. Banks have pressed regulators to unveil that information, but the Fed has yet to do so. Although Tarullo has suggested the Fed can improve the models for next time, the central bank is wary of releasing too much information for fear that banks could reverse-engineer an outcome that is more favorable than it should be.

What's on the agenda?
Mostly the stress test results. But bankers are also likely to bring up a related concern, a proposal under Dodd-Frank which requires banks to perform their own internal stress tests on a much more regular basis in addition to those done already by the Fed.

That requirement is part of a slew of new rules that call for tougher capital and liquidity requirements, living wills, and concentration limits, all of which are likely to be discussed as the comment period for the plan just closed on Monday. Another issue that has made banks nervous is a proposed counterparty credit limit set by the Fed under the plan, which institutions would like to see set much lower than the current 10%.

Do we know which banks will be attending?
The guest list, which comprises only of chief executives, has been a closely guarded secret since media reports of the meeting were leaked last week. Jamie Dimon, JPMorgan Chase's CEO, coordinated the meeting with bankers and will be there when they meet at the New York Fed following an early morning speech by Tarullo. Also likely to be attending the meeting are: Bank of America Corp.'s Brian Moynihan, and Goldman Sachs' Lloyd Blankfein.

Not all of the institutions who underwent the stress test were invited or can make it, however. For example, neither Vikram Pandit, CEO of Citigroup Inc. and Gerald Hassell, head of Bank of New York Mellon, can attend due to scheduling conflicts.

Aren't these types of meetings kept secret?
Yes. The leak angered the Fed when the Wall Street Journal first reported it last week, especially as an agenda was circulated that central bank officials were not made aware of. There have even been persistent rumors the central bank would pull the plug on it altogether.

It is not clear who — if anyone — gained from the public release of the information, as it likely only serves to heighten the tension and distrust between the two parties. Most consider the disclosure counterproductive, saying it will put an additional strain on the conversation.

Will the Fed offer any on-the-spot solutions to bankers' grievances?
It's highly doubtful any decisions or commitments will be made by regulators. The Fed will be in heavy listen-only mode at the meeting and use it as an opportunity to allow banks to air their concerns. Tarullo has already signaled a willingness to work with industry constructively on the stress tests. Institutions have felt battered and overwhelmed by the vast number of rules and additional requirements heaped on them as part of the regulatory reform effort. But it wouldn't be surprising if banks received a dressing down by regulators to keep mum about such meetings going forward.

How much information will we receive after the meeting?
Not a whole lot. Bankers will be under pressure not to say much and the Fed is not given to revealing many details. That said, however, the central bank may have to tell us a little.

If the discussion among bankers is kept strictly to the results of the stress tests, then both banks and the Fed are likely to keep talks under wraps. If, however, CEOs veer into subjects related to Dodd-Frank, that information must be formally disclosed by the central bank as part of its effort to be transparent in its rule-writing process.