Federal Reserve Eases Stress Test Standards for Regional Banks

  • Firms with less than $250 billion in assets would be affected
  • Relief comes after banks missed out on spending bill break

The Federal Reserve may make it easier for financial companies like American Express Co. as well as regional banks such as SunTrust Banks Inc. and BB&T Corp. to return excess capital to shareholders. 

Banks with assets totaling less than $250 billion will not be required to submit as many details or use processes as complex as their larger rivals in their annual capital planning reviews and stress test exams, which help determine how much they can pay out to investors, the Fed said in a statement Monday. The revised guidance is to reflect how the smaller banks pose less systemic risk and have less complicated operations, according to the regulator.

The 2010 Dodd-Frank Act subjected banks with more than $50 billion in assets to heightened supervision by the Fed, including increased capital requirements, stress tests and restrictions on dividend distributions. Regional banks such as Capital One Financial Corp. have fought Congress to raise the asset threshold to escape these requirements. They had hoped to gain relief by adding a provision that would have raised the cutoff to the end-of-year spending legislation signed into law last week, but it was excluded.

Certain safety reviews will only have to be conducted twice a year for the smaller banks, while larger ones will still have to do them quarterly. The regional banks will also have reduced expectations for identifying hard-to-quantify risks and be subject to easier documentation requirements.

The guidance is the “strongest signal yet” that the Fed doesn’t view banks with less than $250 billion in assets as a systemic threat and will raise the level next year if Congress fails to do so, according to Jaret Seiberg, an analyst at Guggenheim Securities.

“This should open the door for regional banks to further boost distributions,” Seiberg said in a client note Monday. “It also should make it more difficult for a regional bank to fail the stress test/capital planning process.”

The Fed began stress tests on the nation’s biggest lenders in 2009 after the financial crisis called their stability into question. The annual exams test whether the banks have enough capital to withstand stressful economic conditions. A second and more difficult round of tests, called the Comprehensive Capital Analysis and Review, evaluates their ability to weather losses and still pay dividends, buy back stock or make acquisitions.

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