Fed Lets Smaller Banks Delay New Standards in Stress Test

Smaller U.S. banks won’t have to meet all of the new capital rules during the next round of Federal Reserve stress tests as regulators gave them more time to adapt to the tougher standards.

While the biggest banks, with total assets of $50 billion or more, must adhere to the Basel III rules finalized in the U.S. in July, lenders with $10 billion to $50 billion will get an extra year, the Fed said today in a statement. The rules apply to tests that will cover nine quarters starting Oct. 1.

The change in standards is part of a global push to fortify banks with more capital and prevent a repeat of the 2008 crisis that almost destroyed the financial system. The Fed’s annual stress tests measure how the firms would fare in a similar shock. Regional and community banks have sought easier terms, saying they’re too small to trigger a worldwide meltdown.

Allowing smaller banks to use current capital rules should give them “time to adjust their internal systems,” the Fed said. At the largest lenders, capital adequacy will still be assessed using the same minimum 5 percent tier 1 common ratio as in earlier stress tests and capital plans, “ensuring consistency with those previous exercises,” the Fed said.

While larger banks have been stress-tested in previous years, smaller financial firms face them for the first time starting Oct. 1. The interim final rules are effective immediately, the Fed said. The central bank will accept comments through Nov. 25 and may enact revisions in response.

Regulators surprised the industry and analysts last year by applying the new Basel framework to most U.S. community banks. Lawmakers and lobbyists said those firms shouldn’t be included because they didn’t cause the 2008 crisis, couldn’t raise capital as easily as the biggest lenders and might have to reduce lending.

To contact the reporter on this story: Aki Ito in San Francisco at aito16@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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