Fed Sets Jan 9 for New Round of Fin Inst Stress Tests

Author: Market News International | Category: News

–Next Fed Stress Test Covers 30 Institutions, Not Just 19 Largest
–To Publish ‘Shock’ Scenario for Six Largest Trading Operations

WASHINGTON (MNI) – The following is the Federal Reserve’s
announcement of a new round of financial institution stress tests,
published Tuesday:

The Federal Reserve Board on Tuesday issued a final rule requiring
top-tier U.S. bank holding companies with total consolidated assets of
$50 billion or more to submit annual capital plans for review.

Also, the Federal Reserve launched the 2012 review, issuing
instructions to the firms, including the macroeconomic and financial
market scenarios the Federal Reserve is requiring institutions to use to
support the stress testing used in their capital plans. As a part of the
review, known as the Comprehensive Capital Analysis and Review (CCAR),
the Federal Reserve in 2012 will carry out a supervisory stress test
based on the same stress scenario provided to the firms to support its
analysis of the adequacy of the firms’ capital.

The aim of the annual capital plans, which build on the CCAR
conducted earlier this year, is to ensure that institutions have robust,
forward-looking capital planning processes that account for their unique
risks, and to help ensure that institutions have sufficient capital to
continue operations throughout times of economic and financial stress.
Institutions will be expected to have credible plans that show they have
sufficient capital so that they can continue to lend to households and
businesses, even under adverse conditions, and are well prepared to meet
regulatory capital standards agreed to by the Basel Committee on Banking
Supervision as they are implemented in the United States. Boards of
directors of the institutions will be required each year to review and
approve capital plans before submitting them to the Federal Reserve.

Under the final rule, the Federal Reserve annually will evaluate
institutions’ capital adequacy, internal capital adequacy assessment
processes, and their plans to make capital distributions, such as
dividend payments or stock repurchases. The Federal Reserve will approve
dividend increases or other capital distributions only for companies
whose capital plans are approved by supervisors and are able to
demonstrate sufficient financial strength to operate as successful
financial intermediaries under stressed macroeconomic and financial
market scenarios, even after making the desired capital distributions.

In addition to issuing the final rule, the Federal Reserve Board on
Tuesday issued instructions outlining the information the Federal
Reserve is seeking from the firms and the analysis the Federal Reserve
will do for the CCAR in 2012. There are two sets of instructions: one
for the 19 firms that participated in the CCAR in 2011, the other for 12
additional firms with at least $50 billion in assets that have not
previously participated in a supervisory stress test exercise. The level
of detail and analysis expected in each institution’s capital plan will
vary based on the company’s size, complexity, risk profile, and scope of

The instructions include a supervisory stress scenario that will be
used by all of the firms and the Federal Reserve to analyze firms’
capital needs to withstand such a scenario while continuing to act as a
financial intermediary. The supervisory stress scenario is not the
Federal Reserve’s forecast for the economy, but is designed to represent
an outcome that, while unlikely, may occur if the U.S economy were to
experience a deep recession while at the same time economic activity in
other major economies were also to contract significantly. For the 19
firms that participated in the CCAR in 2011, the Federal Reserve will
conduct a supervisory stress test using internally developed models to
generate loss estimates and post-stress capital ratios. In addition to
the macroeconomic scenario provided by the Federal Reserve, the six
largest firms will be required to estimate potential losses stemming
from a hypothetical global market shock. The global market shock will be
based on market price movements seen during the second half of 2008, a
time of significant volatility, with adjustments made to incorporate
potential sharp market price movements in European sovereign and
financial sectors.

Firms’ capital adequacy, and their plans to make capital
distributions, will be assessed against a number of criteria, including
projected performance under the stress scenarios provided by the Federal
Reserve and the institutions’ internal scenarios. After evaluating the
institutions’ submissions, the Federal Reserve will publish the results
of the supervisory stress tests for each of the 19 institutions
including the results of the market shock for the six institutions with
large trading operations.

Institutions will be required to submit their capital plans by
January 9, 2012. The capital planning requirements are consistent with
the Federal Reserve’s obligations to impose enhanced capital and
risk-management standards on large financial firms under the Dodd-Frank
Wall Street Reform and Consumer Protection Act.

** Market News International Washington Bureau: 202-371-2121 **

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