Fed un­veils plans to re­duce bank stress tests

National Post (National Edition) - - FINANCIAL POST - Jesse hamiL­ton

WASH­ING­TON •Wal­lStreet banks will have to wait a bit longer for reg­u­la­tors ap­pointed by U.S. Pres­i­dent Don­ald Trump to make the Fed­eral Re­serve’s stress tests less stress­ful. Their re­ward for be­ing pa­tient could be many more con­ces­sions than they in­dus­try an­tic­i­pated.

Ran­dal Quar­les, the Fed’s vice-chair­man for su­per­vi­sion, said Fri­day that a planned over­haul of the an­nualex­amswon’tbein­place un­til at least 2020.

But in good news for Wall Street, he said the re­vamp could tar­get three is­sues that have long frus­trated bankers: the pos­si­bil­ity of hav­ing div­i­dend and share buy­back plans pub­licly re­jected, the test­ing process’s lack of trans­parency, and re­duc­ing the stigma of fail­ing what’s know as the qual­i­ta­tive part of the as­sess­ments.

Im­ple­mented af­ter the 2008 fi­nan­cial cri­sis, the Fed uses the ex­ams to as­sess whether banks have enough cap­i­tal to with­stand the losses that would be trig­gered by an­other down­turn. The ex­ams have led to em­bar­rass­ing head­lines for firms that have failed, and blocked them from re­turn­ing money to their in­vestors.

Quar­les, speak­ing at a Brook­ings In­sti­tu­tion event in Wash­ing­ton, also said Fri­day the Fed plans to give Wall Street an­other re­prieve by de­lay­ing a re­lated rule change that will force the big­gest banks to hold more cap­i­tal.

The Fed pro­posed in April that its risk-based cap­i­tal reg­u­la­tions be tied to its stress tests. The re­sult — a new “stress cap­i­tal buf­fer” based on each firm’s per­for­mance in the tests — is ex­pected to re­sult in mega­banks hav­ing to boost cap­i­tal. For the rest, how­ever, the changes would re­sult in cap­i­tal cush­ions fall­ing by tens of bil­lions of dol­lars.

Re­vis­ing the rule for the big­gest banks will take longer than the 2019 com­ple­tion the Fed an­tic­i­pated, Quar­les said. He added that parts of the pro­posal may still move for­ward next year.

Com­ments on the ear­lier pro­posal “have flagged cer­tain el­e­ments of the regime that could ben­e­fit from fur­ther re­fine­ment,” Quar­les said. He said the Fed ex­pects to adopt a rule in the “near fu­ture” to im­ple­ment some of the ideas while re-propos­ing other as­pects — in­clud­ing ways to an­swer bankers’ con­cerns that the re­sult­ing cap­i­tal de­mands could be sub­ject to volatile swings year to year.

The Fed is con­sid­er­ing re­vis­ing its pro­posal to let banks know their stress-test out­comes be­fore they plan their cap­i­tal dis­tri­bu­tions. That would re­verse one of the most dra­matic as­pects of the tests in which lenders have to guess at the amount of cap­i­tal they’d be able to re­turn to share­hold­ers through div­i­dends, and risk the Fed pub­licly re­ject­ing their plans.

The agency’s pro­posal would also erase some of the dif­fer­ent cap­i­tal thresh­olds banks must stay above. That was the car­rot for the big­gest lenders, which also faced a stick: Cap­i­tal min­i­mums would “some­what in­crease” for firms such as JPMor­gan Chase & Co. and Cit­i­group Inc.

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