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TARP Watchdog: We Should Have Semi-Regular Stress Tests

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One of the five members of the TARP Oversight Committee said on Monday that the government would be wise to run regular stress tests of the nation's banks, even during times of relative economic prosperity.

Richard Neiman, who sits on the Congressional Oversight Panel, said that while he was confident in the model and result of the first stress test on the nation's largest banks, he thinks the stress tests are an important measure of the solvency and stability of those institutions and should be continued.

"I would certainly support that they utilize this on an ad hoc basis, that we encourage institutions to do these tests and report them to the regulators," Neiman told the Huffington Post. "And we recommend that the Treasury continue to track the economic indicators to make sure they are tracking the assumptions used under the plan, and to the extent that they exceed those assumptions, that we repeat those tests."

While acknowledging that there would be a "resource issue," Neiman said that continuing the stress tests is like taking your car in for a check-up, even when it seems everything seems to be running okay.

Neiman's remarks go a step further than the recommendations offered by the panel on which he sits. On Tuesday the COP, which oversees the $700 billion financial industry bailout, released a report recommending that the federal government repeat its stress tests of the nation's largest banks but with the caveat -- "so long as banks continue to hold large amounts of toxic assets on their books." The panel did say that "regulators "should have the ability to use stress tests in the future when they believe that doing so would help to promote a healthy banking system."

The other major finding released on Tuesday was that the COP found the first stress test of the financial system, in which 10 banks were deemed to be in need of additional capital, had used honest and effective metrics.

"The risk modeling under the stress tests were reasonable and it did enhance confidence in our financial institutions," Neiman said. "We now have a greater understanding of the size of the capital gap."

That said, Neiman added, concerns over the economy and financial system in general, persist. In particular, he said he shared the worry of COP Chairwoman Elizabeth Warren, that the Treasury Department had been less than transparent with regards to the money spent through the TARP program. However, he felt progress on that front was being made.

"We have had a series of ongoing interactions with the Treasury as they have added more senior staff, so I am hopeful," said Neiman. "And some of those meetings have been on issues of metrics and means to identify and assess the impact that these capital contributions and other TARP programs are having on the economy. So I am confident and somewhat optimistic, let's put it that way, that there is a seriousness at the Treasury and the Federal Reserve that they acknowledge there is a concern out there for additional clarity and data and that they are taking it seriously."

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