Fed Gives Break to Regional Banks in Annual Stress-Test Demands

  • Central bank releases final rule to relax qualitative testing
  • Banks above $250 billion in assets still facing requirement

Large regional banks and some foreign lenders will get a big break in the Federal Reserve’s annual stress tests as the regulator said Monday it would no longer evaluate their plans for managing capital and risk.

Letting banks with less than $250 billion in assets out of the so-called qualitative side of the stress tests is a particularly welcome move for the industry, because that part of the test has often proved to be a stumbling block for the companies. In issuing the new rule, the Fed decided that regional banks such as BB&T Corp., Fifth Third Bancorp and Zions Bancorporation don’t pose the kind of threat to the financial system the tests are meant to curtail.

Such firms will still be required to meet capital requirements under stress as part of quantitative assessment and “will be subject to regular supervisory assessments that examine their capital planning processes,” the Fed said in its statement.

When Fed Governor Daniel Tarullo first announced in June that the change was coming, he acknowledged that the requirement had “posed a particular challenge” for regional lenders. Tarullo, who is responsible for overseeing the Fed’s regulations, has said in recent years that the 2010 Dodd-Frank Act may have gone too far in subjecting all banks with more than $50 billion of assets to stringent oversight.

The reprieve, which goes into effect for this year’s stress tests, will let out 20 of the lenders and their foreign counterparts that had to be assessed on the qualitative side in last year’s exams. The Fed, in response to public comments, also cut out a part of its original proposal that would have insisted the firms needed to have less than $10 billion in foreign exposure, according to the statement.

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