WASHINGTON – Federal Reserve Board Gov. Daniel Tarullo said Thursday that he expects the agency to eliminate the qualitative requirements in the annual stress testing program for most midsize banks as early as next year.
In an interview with Bloomberg TV Thursday morning, Tarullo said that as part of its continuing review of its Comprehensive Capital Analysis and Review stress-testing program, the Fed has determined that the qualitative aspects that have beguiled so many smaller banks should be cut. That change can be made as soon as the 2017 round of stress tests – the 2016 round are already in progress and the results should be expected "late this month," he said.
"As we did our evaluation, the conclusion we came to was that we can achieve what we need on risk management and capital planning at those regional banks with the normal supervisory program that we have over the course of the year," Tarullo said. "I think the direction in which we're moving would be for banks that are under $250 billion in assets and are basically very traditional banks … to take them out of the qualitative side of the test. I hope and expect that will relieve a lot of the compliance costs."
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The Federal Reserve has been conducting annual stress tests on the biggest banks' liquidity since 2012 tests the banks largely support. But as the Fed advances new liquidity rules, they're starting to question why more rules are necessary.
May 27 -
The Federal Reserve is looking for advice and insight into how it might improve its annual stress testing regime, but banks and industry observers say the central bank is unlikely to touch the aspect of the tests that bothers them most: its secrecy.
December 28 -
The Federal Reserve Board will likely subject large banks to higher minimum capital levels as part of their annual stress tests than the capital requirements that have resulted from past tests, Fed Gov. Daniel Tarullo said Monday.
November 23
Tarullo reiterated that, for the largest global systemically important banks, or G-SIBs, the stress tests will likely become harder over time, saying that the post-stress capital requirements will likely include some portion of the additional capital surcharge buffer that the Fed requires for those banks.
"It won't be just a straight addition of the surcharge, but effectively this will be a significant increase in capital," he said.
Tarullo also said that he welcomes the inquiry that Minneapolis Fed President Neel Kashkari has initiated to find more aggressive means for ending "too big to fail," including breaking up the largest banks or substantially increasing equity capital requirements. Tarullo did not directly address whether he is involved in the inquiry himself, but said all involved should have an open mind to new ideas.
"There's been an ongoing discussion around 'too big to fail' and stability, and I think it's healthy to continue to have that discussion," Tarullo said. "In general, I think those of us who have the responsibility for implementing Dodd-Frank and for putting capital rules in place need to continue doing what we're doing, but we should always be open to new ideas that seem to demand some attention."
