Fed creates council of outside economists to study US bank stress tests

In its search to enhance the credibility of its fundamentally flawed stress tests, the Fed has created a council of outside economists to evaluate the models used by the Fed in its stress tests.

According to a Bloomberg article,

The Federal Reserve created an advisory council of economists to help evaluate the models used in so-called stress tests judging how banks would perform in a poor economy. 

The Model Validation Council will provide the Fed “expert and independent advice on its process to rigorously assess the models used in stress tests of banking institutions,” the central bank said in a statement today in Washington. “The council is intended to improve the quality of the Federal Reserve’s model assessment program and to strengthen the confidence in the integrity and independence of the program.”

U.S. regulators, empowered by the Dodd-Frank Act and criticized for not averting the crisis in mortgage finance, have redesigned their approach to bank supervision, focusing more on systemic risk. They seek to prevent a repeat of the financial crisis that led to the collapse of Lehman Brothers Holdings Inc. in the largest bankruptcy in U.S. history. 

The central bank last month released the results of stress tests showing that 15 out of 19 banks would be able to maintain capital levels above a regulatory minimum in an “extremely adverse” economic scenario, even while continuing to pay dividends and repurchasing stock. ... 

The committee will be led by Francis X. Diebold, an economics professor at the University of Pennsylvania. The panel will also include Peter Christoffersen, of the University of Toronto; Mark Flannery, from the University of Florida; Philippe Jorion, from the University of California at Irvine; Chester Spatt, from Carnegie Mellon University; and Allan Timmermann, from the University of California at San Diego.

Based on a quick Google search (please let me know if I am wrong!), predicting the current financial crisis was not a requirement for appointment to the Model Validation Council.

Your humble blogger can understand why this was not a requirement as there were less than a handful of economists who publicly predicted the crisis.

However, why would anyone think it adds credibility to have economists who did not predict the current financial crisis reviewing models that are supposed to prevent the next crisis?