Wednesday, 22 November, 2017

The Week Ahead: A less stressful time for stress tests?

The Federal Reserve released initial results of its yearly stress tests to determine whether the nation's banks are financially strong enough to weather a severe recession Fed stress test finds: Biggest US banks strong enough to withstand a recession
Heather Davidson | 24 June, 2017, 01:02

The seventh iteration of the Federal Reserve's annual Comprehensive Capital Analysis and Review (CCAR) for banks did not present any problems to the 34 largest financial institutions in the US, as all of them comfortably cleared the quantitative phase of the 2017 stress tests.

For the third time in as many years, all 34 of the biggest banks in the United States met the minimum capital standards in the first half of the Fed stress tests created to safeguard against another financial crisis on Thursday.

Congrats, everyone! Isn't it nice when inconceivably complex regulatory matters can be conveyed in the same pass/not-pass grading system that college stoners rely on when they realize they've been too blitzed this semester to get anything better than a C-?

Four years ago in its annual bank stress test, the Fed predicted that in a severe slowdown Citigroup Inc. would lose almost $55 billion from bad loans.

"We need to avoid imposing unnecessary burden and creating an environment so adverse to risk that banks are inhibited from lending and investing in the businesses and communities they serve", he said.

The Fed has changed the emphasis in stress scenarios from year-to-year to keep banks from managing their portfolios to the test. Under the first scenario, banks lost a projected $493 billion.

Under the Fed's worst-case stress test scenario, the US unemployment rate more than doubles to 10 percent. The required capital buildup has also squeezed the industry's profits, which can cut into bankers' pay and bonuses. The Fed said the losses would reduce the banks' high-quality capital from 12.5 percent of its loans in the fourth quarter a year ago to 9.2 percent at the end of 2017. "The banks themselves are lobbying hard for it, and a clear bill of health from the stress tests will help their cause".

Powell was one of five regulators testifying before the committee, days after the U.S. Treasury Department unveiled a plan to revamp or undo many rules enacted after the 2007-2009 financial crisis. The CCAR results could affect banks' buyback and dividend plans.

The Federal Reserve's latest stress test results, published on June 22, indicate the largest United States banks would remain well capitalised, even under the severe scenario. That is much better than the 4.5 percent threshold that regulators demand, and an improvement on the 8.4 percent common equity tier 1 (CET1) capital ratio assessed past year.

Trump may soon nominate a Fed vice chairman for banking supervision, who will oversee the tests.

Rich Foster, senior vice president and senior counsel for regulatory and legal affairs at the Financial Services Roundtable, seized on the latest bank scorecard by the Fed, saying: "Now is the time to move forward with Treasury's recent recommendations".

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