Fed’s over­haul would ease bur­den of bank stress tests

Los Angeles Times - - BUSINESS BEAT -

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

Ran­dal Quar­les, the Fed’s vice chair­man for su­per­vi­sion, said Fri­day that a planned over­haul of the an­nual ex­ams won’t be in place un­til at least 2020, in­stead of next year as the cen­tral bank had planned.

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 share­buy­back plans pub­licly re­jected, the test­ing process’ lack of trans­parency, and re­duc­ing the stigma of fail­ing what’s known as the qual­i­ta­tive part of the as­sess­ments.

Quar­les em­pha­sized, how­ever, in re­marks made at a Brook­ings In­sti­tu­tion event in Wash­ing­ton, that the changes are “not in­tended to al­ter ma­te­ri­ally the over­all level of cap­i­tal in the sys­tem or the strin­gency of the regime.”

Im­ple­mented af­ter the 2008 fi­nan­cial cri­sis, the ex­ams are used by the Fed to as­sess whether banks have enough cap­i­tal to with­stand the losses that would be trig­gered by a se­vere eco­nomic down­turn. That has led to some em­bar­rass­ing head­lines for banks that have failed the tests.

Quar­les said the Fed is con­sid­er­ing let­ting 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 can re­turn to share­hold­ers through div­i­dends — and risk the Fed pub­licly re­ject­ing their plans.

In an April pro­posal, the Fed had al­ready made stress-test con­ces­sions, in­clud­ing re­mov­ing the ex­pec­ta­tion that lenders would grow their bal­ance sheets and keep pay­ing div­i­dends when fac­ing ma­jor eco­nomic stress. The agency’s pro­posal would also erase some of the cap­i­tal thresh­olds that banks must stay above.

Quar­les said Fri­day that he fa­vors elim­i­nat­ing a re­quire­ment for a pub­lic an­nounce­ment when banks fail the qual­i­ta­tive part of the tests, which mea­sures each firm’s abil­ity to man­age cap­i­tal in a cri­sis. He said he sup­ports “re­mov­ing the pub­lic ob­jec­tion tool, and con­tin­u­ing to eval­u­ate firms’ stress test­ing prac­tices through nor­mal su­per­vi­sion.”

To boost trans­parency about the test, Quar­les said the Fed in­tends to give banks “port­fo­lios of hy­po­thet­i­cal loans and as­so­ci­ated loss rates.” The Fed has been hes­i­tant to re­veal much about its tests be­cause of fears that pro­vid­ing too many de­tails would be akin to giv­ing banks the an­swers be­fore the exam. Quar­les said Fri­day that he’s al­ways been “skep­ti­cal” of that con­cern.

Quar­les also said the Fed plans to de­lay a re­lated rule change that will force the big­gest banks to hold more cap­i­tal. He said com­ments “have flagged cer­tain el­e­ments of the regime that could ben­e­fit from fur­ther re­fine­ment.”

The Fed has pro­posed 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. But for the rest of the in­dus­try, the changes would re­sult in cap­i­tal cush­ions fall­ing by tens of bil­lions of dol­lars.

Smaller banks could get an­other rule change in their fa­vor.

For banks with less than $250 bil­lion of as­sets, in­clud­ing SunTrust Banks Inc. and Fifth Third Ban­corp, the Fed is seek­ing to re­duce the fre­quency of stress tests to ev­ery other year. Quar­les said he is urg­ing the full Fed board to make 2019 an off year for such lenders, mean­ing they wouldn’t be tested again un­til 2020.

Quar­les is sched­uled to ap­pear at hear­ings in the House and Se­nate next week to up­date over­sight com­mit­tees on the Fed’s reg­u­la­tory ef­forts.

Jac­que­lyn Mar­tin As­so­ci­ated Press

RAN­DAL QUAR­LES, Fed­eral Re­serve vice chair­man for su­per­vi­sion, said re­vamped rules for an­nual ex­ams for banks, known as stress tests, could tar­get three is­sues that have long frus­trated bankers.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.