Fed unveils plans to reduce bank stress tests
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.