Banks with less than $250 billion in total assets may soon be seeing a relief in their federal obligations. A proposed alteration from the Federal Reserve could mean that smaller regional banks who do not conduct significant nonbank or international business would be exempted from certain parts of the stress tests on their economic resilience.
Issue Background
2010 Dodd-Frank Financial Reform Bill compels any banking institution with over $50 billion in assets to undergo yearly assessments designed to measure their viability against periods of financial stress. The ultimate goal is regularly ensuring that the system is strong enough to withstand widespread economic turmoil like that seen in 2008 Great Recession.
The tests encompass a wide variety of stressors, from overall adequacy of the organization capital to structural stability to whether planned capital distributions are viable in a variety of scenarios. This is a rigorous and exhaustive process that can take up significant staff time and organizational funds.
More than 30 banks across the country take this test every year, but for smaller institutions, the cost outlay can be significant — particularly for those close to the $50 billion line. In a recent statement at Yale University, Federal Reserve governor Daniel Tarullo indicated that the organization would be moving to a more risk-sensitive, customized testing model.
Model Alterations
Tarullo statement indicates that banks that fit the aforementioned criteria (greater than $50 and fewer than $250 billion dollars in assets, limited international or nonbank business) would be exempt from the qualitative portion of the stress test, which deeply investigates the organization risk-management systems. However, all affected banks will have to demonstrate that they can survive a potential recession with adequate capital reserves to maintain lending operations, as well as additional scrutiny around mortgage and money-laundering rules.
Systemic Importance
The Fed is also reportedly considering a separate proposal that would raise the capital requirements for banks considered systemically important. In short, the modifications aim to create regulatory measures that are more stringent for financial organizations of greater importance, while relaxing non-essential requirements for smaller firms.
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