The banking regulators announced that they are contemplating delaying the implementation of the stress test for the mid-size banks and financial institutions (with consolidated assets of $10-50 billion). This comes as a major relief for these institutions.
As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Federal Reserve Board, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) are authorized to conduct annual capital adequacy tests.
Now in a coordinated effort, these regulators are planning to withhold the final rule making and immediate execution of the proposed rules till September 2013. Mid-size banks would have to start with the stress test immediately if the final rules related to it were announced.
One of the main pre-conditions for implementation of the rule is that these companies should have a strong and efficient system in place to conduct the stress test.
However, many concerns were put forward regarding the resources and the ability of the companies to conduct the tests in the short span between the declaration of the final rule and onset of the stress test procedure. Hence, the proposed delay will give the companies sufficient time to put the required system in place for conducting the stress test.
Approximately 65 banks and financial institutions – including CIT Group Inc. (CIT), First Niagara Financial Group Inc. (FNFG), Synovus Financial Corporation (SNV), E*TRADE Financial Corporation (ETFC) and First Horizon National Corporation (FHN) – will go through the stress test.
The Fed had proposed the stress test rules in December 2011 and stated that once the final rules are announced, the major banks would have to implement them with immediate effect. Likewise, in January 2012, the OCC and the FDIC came up their proposed set of rules for conducting annual stress test for mid-size banks and other financial institutions. However, the final rule for the stress test for mid-size financial companies is yet to be announced.
Additionally, the OCC is planning to go ahead with its annual stress test for larger banks and financial institutions (assets of more than $50 billion) from this year itself. However, the regulator has the right to grant permission to these banks to delay the capital adequacy stress test, albeit on a case-by-case basis.
Authorized under the Dodd-Frank Act, the stress tests were first introduced after the 2008 financial crisis. The stress test on the large banks is being conducted on an annual basis by the Fed since 2009.
The economic benefits of the stress tests are indisputable. These would help build up weak capital levels of banks, which are a looming threat to the economy. Also, this could ultimately translate into less involvement of the taxpayers’ money for the bailout of troubled financial institutions.
CIT GROUP (CIT): Free Stock Analysis Report
E TRADE FINL CP (ETFC): Free Stock Analysis Report
FIRST HRZN NATL (FHN): Free Stock Analysis Report
FIRST NIAGARA (FNFG): Free Stock Analysis Report
SYNOVUS FINL CP (SNV): Free Stock Analysis Report
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