Mid-Sized U.S. Banks Have Another Year Before Stress-Testing

FDIC Rule Gives Banks Until Next Year to Start Stress Tests
Martin Gruenberg, acting chairman of the FDIC, addresses the agency's open board meeting in Washington. Banks and regulators “will benefit from the forward-looking results” of the tests, Gruenberg said when his agency proposed its rule. Photo: Rich Clement/Bloomberg

Mid-sized U.S. banks can wait until next September to begin self-administered stress tests under regulators’ rules approved today that call for public disclosures of some of the findings.

The Office of the Comptroller of the Currency, Federal Deposit Insurance Corp. and the Federal Reserve established guidelines for tests that lawmakers included in the Dodd-Frank Act as a way for banks with more than $10 billion in assets to show they can withstand an economic crisis. Banks with more than $50 billion in assets must start the tests this year, and those between $10 billion and $50 billion get an extra year.

“I believe the implementation timeline in the final rule strikes the right balance,” Comptroller of the Currency Thomas Curry said at today’s FDIC meeting, adding that the agencies will address another concern from banks -- that regulators coordinate their approaches to the tests. “As supervisors we should avoid pushing and pulling companies in different directions,” Curry said.

FDIC statistics show 108 U.S.-regulated banks meet the size threshold for participation in the internal tests overseen by the FDIC, OCC and the Fed. The capital-adequacy testing, using hypothetical conditions posed by the regulators, require large banks such as New York-based JPMorgan Chase & Co. and Charlotte, North Carolina-based Bank of America Corp. to report results to the regulators early next year, followed by a publicly released summary.

Smaller Banks

Smaller institutions, such as Portland, Oregon-based regional lender Umpqua Holding Corp., will use data through Sept. 30, 2013 to report results the following year. They won’t start releasing public summaries until June 30, 2015.

“Stress testing is a key tool to ensure that financial companies have enough capital to weather a severe economic downturn without posing a risk to their communities, other financial institutions, or to the general economy,” Fed Governor Daniel K. Tarullo said in a statement today.

The self-administered tests are in addition to those given to the 19 largest U.S. bank holding companies by the Fed, which gave passing marks to 15 in March.

Because each of the regulators has distinct jurisdictions, there will be cases in which the largest banks are subjected to tests from more than one agency. A big bank holding company among those already tested annually by the Fed will also have to administer the new Fed self-tests, as well as tests from the other agencies in their subsidiaries -- the OCC’s tests for national banks and the FDIC’s for state banks that aren’t Fed members.

New Schedule

Banks with more than $50 billion in assets will receive stress scenarios from regulators next month, and based on their Sept. 30 data will analyze how they fared under each scenario. The schedule will remain in place in subsequent years, with stress scenarios released for all affected banks each November.

FDIC board member Jeremiah Norton cautioned investors against relying too heavily on stress-test results.

“I hope that we don’t send the signal that because a firm passes the stress test that investors -- again, mainly creditors and counterparties but equity holders as well -- don’t need to worry,” Norton said. “The government doesn’t always know what’s going to happen, doesn’t have the crystal ball that looks perfectly into the future.”

Nonbank financial firms designated by the Financial Stability Oversight Council as systemically important will also have to conduct stress tests, according to the Fed’s rule.

Deposit Insurance

The FDIC also voted today to finalize a rule it proposed in March to change how banks evaluate assets to determine their payments to the deposit insurance fund. In the rule, firms above the $10 billion threshold that hold riskier assets will shoulder more of the burden of protecting depositors while leaving unchanged the total collected by the FDIC.

The agency also issued an update on the insurance fund, saying its projections for how much bank failures will cost the fund from 2012 through 2016 have dropped by $2 billion to an estimated $10 billion. The fund will gain about $12.4 billion this year from assessments on banks.

“The rapid recapitalization of the Deposit Insurance Fund reflects an industry that is stronger today than at any point in the last four years,” said James Chessen, chief economist at the American Bankers Association in Washington, in a statement. “The banking industry is returning to profitability and failures continue to decline sharply. As a result, the Deposit Insurance Fund is growing faster than expected and will have the resources to weather any contingency that could arise.”

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