WASHINGTON — The Federal Reserve Board issued a proposal Tuesday that would reduce the number of banks required to conduct company-run stress tests and reduce the frequency and complexity of supervisory stress tests for larger state member banks.
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Consistent with the reg relief law enacted in May, the proposal would raise the threshold for state member banks to be required to run internal stress tests from $10 billion to $250 billion, effectively eliminating the stress testing requirement for all but the largest banks. The Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency issued similar proposals to implement that provision last month.
Under the Fed proposal, for those state member banks above $250 billion of assets supervisory stress tests would be conducted every other year rather than annually, which the agency said is appropriate for firms that pose less of a risk to the financial system.
“Based on the Board’s experience overseeing and reviewing the results of company-run stress testing over more than five years, the Board believes that a two-year stress testing cycle generally would be appropriate for certain state member banks,” the proposal said. “Specifically, the state member banks that would be subject to a two-year stress testing cycle under the proposal would not be the subsidiaries of larger, more complex firms, which can present greater risk and therefore merit closer monitoring.”
The Fed noted that state member banks that are subsidiaries of larger firms — those with more than $700 billion in assets or $75 billion in cross-jurisdictional activity — would still be subject to annual stress tests.
The proposal also notably eliminates the “adverse” scenario from the stress testing regime, requiring banks instead to test their balance sheets against a baseline scenario and a severely adverse scenario.
“Because the ‘baseline’ and ‘severely adverse’ scenarios are designed to cover the full range of expected and stressful conditions, the ‘adverse’ stress-testing scenario has provided limited incremental information to the Board and market participants,” the proposal said.
The proposal also would change the definition of “severely adverse” to include “a set of conditions … that overall are significantly more severe than those associated with the baseline scenario.”
The Fed in October proposed a series of changes to various aspects of the post-crisis enhanced prudential standards in response to the passage of the Senate’s regulatory relief bill. Among those changes were increasing the threshold for the applicability of many of those capital and liquidity standards, and the agency noted that additional rules would follow in the coming months to accompany the proposed changes.
