Tags: banks | capital | stress test | financial crisis

Banks to Need Billions More Capital in Tests Under Fed Proposal

Image: Banks to Need Billions More Capital in Tests Under Fed Proposal

Monday, 26 Sep 2016 03:03 PM

Wall Street would have to come up with billions of dollars in additional capital in a proposed revamp of the Federal Reserve’s stress tests that would also scrap some parts of the annual exercise that lenders have criticized.

As the Fed has previously signaled, it is considering changes that would raise the minimum capital targets that each bank has to have to receive a passing grade, Fed Governor Daniel Tarullo said Monday. But the Fed is also mulling concessions that Wall Street has sought, such as eliminating its assumption that lenders would continue to pay out the same level of dividends and buy back shares during periods of severe financial duress, Tarullo said.

The purpose of the overhaul is to try to merge stress testing with related capital rules, including incorporating the largest banks’ so-called capital surcharges that each bank must meet based on how big and complex it is, Tarullo said in prepared remarks for a speech at the Yale School of Management in New Haven, Connecticut.

“This would generally result in a significant increase in capital requirements,” he said.

Tarullo has been indicating for months that the Fed plans to ramp up capital demands in stress tests and Wall Street has been anxiously awaiting the agency’s proposal. The exams already represent the highest capital hurdle that U.S. banks must clear to show they can survive a hypothetical crisis devised by regulators, such as an extended economic downturn. What bankers may not have been counting on was that the Fed might add something besides surcharges to the mix.

Tarullo said the central bank will swap out its old 2.5 percent capital conservation buffer -- one of the pieces tallied into each firm’s capital target -- for a new “stress capital buffer” derived from each firm’s own stress-test results. That new number is the product of a simple subtraction: How much capital the bank starts with before the stress scenario the Fed hatches, minus how much the firm has at its lowest point in the nine quarters of the hypothetical stress period. If the institution started with 13 percent and dropped to 8, its buffer is 5 percent. And the buffer won’t be allowed to be less than the old 2.5 percent.

Tarullo said the proposed changes would not apply to the next round of stress tests.

 

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Wall Street would have to come up with billions of dollars in additional capital in a proposed revamp of the Federal Reserve's stress tests that would also scrap some parts of the annual exercise that lenders have criticized.
banks, capital, stress test, financial crisis
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2016-03-26
Monday, 26 Sep 2016 03:03 PM
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