Featured # Markets | 2 years ago

Fed Contemplating Revising Stress Tests, Capital Buffers for U.S. Banks

According to Fed chair, Janet Yellen, the Fed is contemplating changing the annual stress tests it gives U.S. banks to move to a more risk-sensitive, firm-niche approach that would increase capital requirements for big banks based on the results of the test. Testifying at a House of Representatives Financial Services Committee hearing on Wednesday, Yellen commented the Fed is “now considering making several changes to our stress testing methodology and process.” The stress test is trying to prove that individual banks can endure a massive financial crisis.

Under the revisions the Fed is pondering, banks would set capital requirements, called capital buffers, that banks must maintain to honest the effects of a downturn based on the results.

“The existing capital conservation buffer would be replaced with a risk-sensitive, firm-specific buffer that is sized based on stress test results,” she addedTh.

For the eight U.S. banks that are big and considered important to the global financial system the new buffer calculation “would result in a significant aggregate increase in capital requirements,” Yellen commented.

Yellen did not comment on the forecast for the economy or monetary policy in her prepared statements. The chair’s comments are the most recent about possible changes in the central bank’s oversight of the country’s banking system, as Republicans in Congress disapprove its regulation of financial institutions under powers it was given by the 2010 Dodd-Frank Wall Street Reform law.

Fed Governor Daniel Tarullo delivered a speech on potential reforms on Monday, and last week the central bank outlined a plan to curb Wall Street wages on the energy sector. Yellen reported to the committee, in general, large and regional banks are currently well capitalized and profitable, and the Fed is foreseeing growth in commercial and industrial lending. Banks have faced some obstacles in recent years because of feeble growth in interest and noninterest income, she reported.

Yellen also reported Congress may want to think about making small community banks exempt from the Volcker Rule limiting their investments and the compensation limits in Dodd-Frank.

“The risks addressed by these statutory provisions are far more significant at larger institutions than they are at community banks,” she said. “In the event that a community bank engages in practices in either of these areas that raise heightened concerns, we would be able to address these concerns as part of the normal safety-and-soundness supervisory process.”

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