WASHINGTON – Midsized U.S. banks can wait until next September to begin self-administered stress tests under regulators’ rules approved last week that call for public disclosures of some of the findings.
The Office of the Comptroller of the Currency, Federal Deposit Insurance Corp. and the Federal Reserve established guidelines for tests that lawmakers included in the Dodd-Frank Act as a way for banks with more than $10 billion in assets to show they can withstand an economic crisis. Banks with more than $50 billion in assets must start the tests this year, and those between $10 billion and $50 billion get an extra year.
I believe the implementation timeline in the final rule strikes the right balance, Comptroller of the Currency Thomas Curry said at the FDIC meeting, adding that the agencies will address another concern from banks – that regulators coordinate their approaches to the tests.
As supervisors, we should avoid pushing and pulling companies in different directions, Curry said.
FDIC statistics show 108 U.S.-regulated banks meet the size threshold for participation in the internal tests overseen by the FDIC, OCC and the Fed. The capital-adequacy testing, using hypothetical conditions posed by the regulators, require large banks such as New York-based JPMorgan Chase & Co. and Charlotte, N.C.-based Bank of America to report results to the regulators early next year, followed by a publicly released summary.
Smaller institutions, such as Portland, Ore.-based regional lender Umpqua Holding, will use data through Sept. 30, 2013, to report results the following year. They won’t start releasing public summaries until June 30, 2015.
Stress testing is a key tool to ensure that financial companies have enough capital to weather a severe economic downturn without posing a risk to their communities, other financial institutions, or to the general economy, Fed Governor Daniel Tarullo said last week.
The self-administered tests are in addition to those given to the 19 largest U.S. bank holding companies by the Fed, which gave passing marks to 15 in March.
Because each of the regulators has distinct jurisdictions, there will be cases in which the largest banks are subjected to tests from more than one agency. A big bank holding company among those already tested annually by the Fed will also have to administer the new Fed self-tests, as well as tests from the other agencies in their subsidiaries – the OCC’s tests for national banks and the FDIC’s for state banks that aren’t Fed members.
Banks with more than $50 billion in assets will receive stress scenarios from regulators next month, and based on their Sept. 30 data will analyze how they fared under each scenario. The schedule will remain in place in subsequent years, with stress scenarios released for all affected banks each November.
FDIC board member Jeremiah Norton cautioned investors against relying too heavily on the results.
I hope that we don’t send the signal that because a firm passes the stress test that investors – again, mainly creditors and counterparties but equity holders as well – don’t need to worry, Norton said.