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The Federal Reserve Board issued a final rule Friday that will give banks an additional three months to comply with stress test requirements.
October 17 -
The Federal Reserve Board on Thursday proposed changes to the capital planning and stress testing process, including giving banks an additional three months to undertake the effort.
June 12 -
Esther George, president of the Kansas City Fed, highlighted the shortcomings of banking regulation, especially as applied to community banks, and said the "pendulum has swung too far" on consumer protection.
September 23 -
Stress tests have a spotty record as a tool for identifying weaknesses and problem institutions.
July 2
Community banks, by and large, loathe the notion of mandatory stress testing.
Federal Reserve Board Gov. Jerome Powell understands that view. Powell, during a conference call Monday, told attendees that "large-bank supervisory approaches are just not appropriate" for community banks, singling out stress tests as a prime example of something that all regulators want to keep out of small bank exams.
"We do
Many small banks would struggle to satisfy the stress-testing requirement. Chris Cole, senior regulatory counsel at the Independent Community Bankers of America said stress testing would require small banks to expend scores of work hours and hire costly third-party consultants.
Powell's comments are heartening for community bankers concerned about increased regulatory burden. Unfortunately for the industry's optimists, Powell conceded that, for all their resolve, there is no way to guarantee that stress testing will not eventually creep into community bank exams.
"We understand full well that community banks were not a principal cause of the financial crisis," Powell said. "We also recognize that things will trickle down unless we take active, strong steps to stop that from happening. We've tried to take those steps knowing we'll have to keep watching, because it's just the nature of things that [trickle-down] will happen."
Michael Stevens, senior executive vice president at the Conference of State Bank Supervisors, agreed with Powell's assessment. He said regulations tend to creep downhill as a result of the leeway individual bank examiners are given to exercise judgment. Examiners have at times guided banks to adopt technique they see working at other institutions, he said.
Such thinking could also bring stress testing to smaller banks, Cole said.
"That's exactly the way it would happen, particularly if [an examiner] said your lending portfolio is risky enough for stress testing," he said. "After a while, you'd have a minority of community banks undergoing these tests, then some sort of guidance would come out. It could happen real quickly."
Stevens, who co-authored a white paper in 2010 suggesting that small banks should consider using some form of stress testing as a risk-management tool, agreed with Powell that it should not be required. "It should not be a regulatory expectation for community banks," he said.
Stress tests are regulatory exercises
Banks with less than $10 billion of assets are exempt.
Community bankers' aversion to stress testing can be traced back to general regulatory fatigue, said Peter Cherpack, senior director at Ardmore Banking Advisors in Pennsylvania. "They've thrown the baby out with the bathwater when it comes to stress testing," he said.
Larger community banks are likely to implement stress tests voluntarily, Cherpack said, particularly if they have ambitions to grow. He said smaller banks might adopt limited forms of stress testing to please regulators. "There are methods of stress testing that are very relevant and not hard to do," Cherpack added. "It's symbolic of a bank that has good credit management."
Regarding the supervisory process, Esther George, president of the Federal Reserve Bank of Kansas City,
"Regulation and supervisory frameworks have evolved with far less reliance on examiner experience and more emphasis on data-driven" models, George said.
While supervisory frameworks are considered highly successful for big banks, she said that substituting rigid rules for examiner judgment at small banks "has altered the supervisory process without adding value and has instead created higher costs of compliance."
Examiners' ability to exercise individual discretion adds significant value to the regulatory process, Powell said, adding that he wanted community bankers to inform the Fed if they were being asked to perform stress tests.
"If we fail on this, we sure hope they'll let us know," he said.