Fed Makes It Easier For Banks To Pass Stress Tests (#GotBitcoin?)
The Fed recently made it easier for banks to pass the stress tests, easing a “qualitative” component of the exam that evaluates banks on factors such as the quality of its internal data and management controls. Fed Makes It Easier For Banks To Pass Stress Tests (#GotBitcoin?)
The Fed is also considering changes that would eliminate the chance banks could fail the second part of the test—which evaluates whether the banks would have enough capital under a hypothetical shock to remain above all regulatory capital requirements—in favor of a continuous capital requirement.
Those changes have sparked concerns from some Democrats, who say the Fed is making the exercise too easy for banks. For the second time ever this year, no firm failed the stress tests.
Annual exam must explore unexpected scenarios or it might fail to prepare financial system for next downturn.
Federal Reserve Chairman Jerome Powell said stress tests of the nation’s largest banks must adapt and keep firms on their toes, or the annual exam could fail to prepare the financial system for the next downturn.
“If the stress tests do not evolve, they risk becoming a compliance exercise, breeding complacency from both supervisors and banks,” Mr. Powell said Tuesday in prepared remarks for a stress-testing conference at the Federal Reserve Bank of Boston.
“When the next episode of financial instability presents itself, it may do so in a messy and unexpected way,” Mr. Powell added. “Banks will need to be ready not just for expected risks, but for unexpected ones.”
The tests must vary from year to year and explore “even quite unlikely scenarios,” Mr. Powell said, warning that too rote an exam could encourage banks to have similar portfolios, making the system more vulnerable to specific risks.
“All banks would look much alike rather than the banking system we want and need, one with diverse institutions with different business models,” he said.
U.S. Banks Cram For Fed Risk Test, With Ripple Effects In Repo
New quarterly data from the biggest U.S. banks suggest that some will need to back away from short-term lending markets by year-end to avoid triggering requirements that they hold more capital.
The data, posted on Friday by the Federal Reserve, showed four of the six biggest U.S. lenders were above or close to thresholds that would increase their capital surcharges.
An easy way to get the scores down would be doing less lending through overnight repurchase agreements and foreign exchange swaps, said analysts who track the filings.
Those markets have experienced stress in recent months. Retreats by lenders would make them more vulnerable.
“If the economic narrative shifts in December, it could have a greater impact than if it were to shift at any other point in the year,” said Josh Younger, a derivatives strategist at JPMorgan who is not involved in the bank’s lending.
Calculations from September data in the JPMorgan Chase & Co (JPM.N) filing, for example, indicate that its score as a Global Systemically Important Bank, or GSIB, was 751, or 21 points above the level at which its capital surcharge would be increased to 4% from 3.5%.
If JPMorgan doesn’t get below 730 it will have to hold another $8 billion of capital, analysts estimated. That would dampen return on equity. The bank has said it will be under the threshold.
The Fed, similar to bank regulators abroad, began imposing GSIB surcharges in 2016. The aim was to make big banks bear the costs to others of their failure and force them to choose whether to shrink or hold more capital.
Goldman Sachs Group Inc (GS.N) needs to take at least 16 points from its score to avoid a higher surcharge and Bank of America Corp (BAC.N) needs to shave eight points. Citigroup Inc (C.N) is two points under a markup, but could seek a wider margin because higher fourth-quarter stock prices are poised to add to all scores.
Backing away from certain short-term lending instruments, particularly swaps and other derivatives, is one of the easiest temporary ways to reduce scores, which are compiled from dozens of measurements and calculations.
Borrowers in the $3.2 trillion-a-day FX swap market are nervously looking toward year-end and having to decide between paying up or exiting positions.
The Federal Reserve has been stabilizing the repo market since mid-September when rates spiked to as much as 10% from about 2%.
Regulators Find Shortcomings In Resolution Plans At Six Large U.S. Banks
The banks must address the shortcomings by the end of March.
Regulators on Tuesday said they had found “shortcomings” in the resolution plans at six of the largest U.S. banks, while none of the eight major banks they examined had more serious “deficiencies.”
The Federal Reserve and Federal Deposit Insurance Corp. said the firms, including Bank of America Corp. , Citigroup Inc. and Wells Fargo & Co. had shortcomings related to their ability to reliably produce data needed to execute orderly wind-downs, also known as living wills, “in stressed conditions.”
The six banks, which also include Bank of New York Mellon Corp. , Morgan Stanley and State Street Corp. , must address the shortcomings by the end of March. They next submit living wills in 2021.
Tuesday’s moves, the regulatory equivalent of a slap on the wrist, are less severe than the finding of a “deficiency,” which could lead to more stringent capital and liquidity requirements for the firms.
The agencies didn’t find shortcomings in the plans from Goldman Sachs Group Inc. and JPMorgan Chase & Co.
Fed officials have grown increasingly confident that big U.S. banks are safer than they were in 2008, when the financial crisis exposed significant weaknesses in their risk management.
Tuesday’s findings are a turnabout from just three years ago, when the Fed ordered five big U.S. banks to make significant revisions to their plans, citing deficiencies.
“The largest banks have been making steady progress, and the regulators are in greater agreement on what progress is than in prior rounds,” said Karen Petrou, managing partner of Federal Financial Analytics, a regulatory advisory firm.
Wells Fargo said it was pleased the Fed found no deficiencies with its plan.
A Bank of New York spokeswoman said the lender “will work diligently to address the specific areas of feedback identified by the regulators in the required time frame.”
Spokesmen for Bank of America, Citi and JPMorgan declined to comment. The other banks didn’t immediately respond to requests for comment.
Kevin Fromer, president and chief executive of the Financial Services Forum, which represents the largest U.S. lenders, said the results show the firms “are strong, resilient and resolvable.”
Under the 2010 Dodd-Frank law, big banks must file plans showing they have a credible strategy to go through bankruptcy without causing a broader economic panic, one of many provisions in the law designed to prevent a repeat of financial-crisis bailouts.
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