Home / Financial Services/ Fed gives banks more stress test information, unveils 2019 scenarios

Fed gives banks more stress test information, unveils 2019 scenarios


Comments / {{hitsCtrl.values.hits}} Views / Friday, 8 February 2019 00:00

Facebook

FILE PHOTO: Flags fly over the Federal Reserve Headquarters on a windy day in Washington, U.S - REUTERS 

WASHINGTON (Reuters): The Federal Reserve moved on Tuesday to make its stress testing of large banks more transparent, providing financial firms significantly more information about how their portfolios would perform under potential economic shocks.

During the 2019 round of stress tests and going forward, big banks will know “significantly more” information about the models the US central bank uses to test banks’ books, including how hypothetical loans perform under the tests and more detailed information about the Fed’s models.

The 2019 tests will include factoring in a jump to 10% unemployment from the current 4% rate, as well as elevated stress in corporate loan and commercial real estate markets in the most severe scenario.

The transparency changes, first proposed by the Fed in December 2017 and finalised Tuesday, are aimed at long-running bank complaints that the current stress-testing process is cumbersome and opaque.

In addition, less complex banks with assets between $100 billion and $250 billion, such as SunTrust Banks and Fifth Third Bancorp will not have to face the 2019 tests, as the Fed is moving to a two-year cycle for testing those firms.

The industry had been tracking the 2019 testing closely, as Fed officials have said they would like to make the tests more accommodating, amid bank gripes that prior rounds have been overly harsh and resource-intensive.

The steps the Fed is taking to make the testing more transparent should address some of those concerns, although proponents of stricter rules on Wall Street caution too much transparency could allow banks to mask underlying risks by gaming the exam.

The annual test of bank stability subjects the books of large banks like JPMorgan Chase and Citigroup to hypothetical economic downturns to ensure they can withstand the blow without collapsing. The tests vary slightly every year, as the Fed probes for weak points in bank finances, and become more difficult as the economy improves.

“We are confident this scenario will effectively test the resiliency of the nation’s largest banks,” said Randal Quarles, the Fed’s vice chair for supervision.

The stress tests are a major yearly event for those firms, as they cannot distribute capital through dividends, share buybacks, or other investments without clearing that Fed hurdle. Thirty-four lenders passed the test last year, while Goldman Sachs and Morgan Stanley received conditional approvals that limited their capital distributions. The US subsidiary for Deutsche Bank had its capital plan rejected by the Fed.


Share This Article

Facebook Twitter


DISCLAIMER:

1. All comments will be moderated by the Daily FT Web Editor.

2. Comments that are abusive, obscene, incendiary, defamatory or irrelevant will not be published.

3. We may remove hyperlinks within comments.

4. Kindly use a genuine email ID and provide your name.

5. Spamming the comments section under different user names may result in being blacklisted.

COMMENTS

Today's Columnists

Religion is a problem in Sri Lanka; can it be a solution?

Saturday, 17 August 2019

Generally, it is expected that religion should be a solution to a problem. Ironically in Sri Lanka religion is the problem. Therefore, what would be the solution? When religion becomes a problem of a country....


Orthodoxy and change: A perennial Muslim issue

Saturday, 17 August 2019

Whether Muslims live as minorities in non-Muslim countries or as majorities in a total of fifty seven countries, the clash of orthodoxy with modern challenges is a perennial issue that bedevils progress on several fronts in these communities.


Making the MCC Compact work for Sri Lanka

Friday, 16 August 2019

It is a sign of these political times that even an apolitical issue like a foreign aid program becomes a hot topic in Sri Lanka. In April 2019, the Board of Directors of the Millennium Challenge Corporation (MCC) approved a compact program for Sri La


Sri Lanka needs a president hungry for success, not power

Friday, 16 August 2019

The late John F. Kennedy described politics as a “noble adventure, an adventure in which one joins hands with the masses for the service of man”. Not that the Kennedys didn’t play “politricks” in their heyday. But playing “politricks” w


Columnists More

Special Report

SPECIAL REPORT MORE