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In a surprise move, the Federal Reserve Board proposed significant changes to its stress testing regime, including dropping its Tier 1 Common Capital requirements and delay leverage and risk-based capital ratio requirements for banks with "advanced approaches" in risk-based modeling.
July 17 -
No bank has fully disclosed what it spends on the Federal Reserve's Comprehensive Capital Analysis and Review, in part because the figure is hard to isolate. It's a key piece of information missing in the debate over banks' regulatory burden.
May 18 -
Rather than viewing stress tests only as a burden, bank executives are recasting them as opportunities to gain valuable insight into their loan portfolios.
June 25 -
Banks with assets totaling between $10 billion and $50 billion have begun publishing the results of their Dodd-Frank Act mandated stress tests this week and will continue to do so through the end of the month, providing a new window into the workings of regional institutions.
June 16 -
Six regional banks have reported their stress-test results under Dodd-Frank for the first time, projecting Tier 1 common equity ratios ranging from 8.04% to 11.4% after an economic shock. However, several also projected multimillion-dollar losses during the stressful period.
June 16
Stress tests are not officially required for banks with less than $10 billion in assets, but try telling that to bank examiners.
Stress testing has become part of annual regulatory exams even for banks small enough to be officially exempted from the process, according to a new survey by the consultancy Sageworks. The firm queried 180 banks and credit unions, 99% of which fall below the threshold of $10 billion in assets that the 2010 Dodd-Frank Act set for stress testing.
Nearly a third of the survey's respondents said that in their most recent bank exams they were pressured to begin stress testing or expand the practice. Another 3% said the examiners flat-out required them to start stress testing by the next exam.
That was in addition to the 43% of banks that said they already stress tested. Only a quarter of respondents said they do not stress test and that their examiners did not mention it.
"You're seeing it pick up a lot more this year," said Rob Ashbaugh, a senior risk management consultant at Sageworks. "Bigger banks are doing it, and it only makes sense that they ask the smaller banks to do it, too."
Ashbaugh emphasized that the stress testing done by community banks is usually narrow in scope and rarely involves macroeconomic modeling making it a very different beast from what the large banks do.
Banks with $50 billion or more in assets have to undergo the Federal Reserve's Comprehensive Capital Analysis and Review, a stringent exam that encompasses all of a bank's internal controls and requires a
The three federal banking agencies the Federal Reserve Board, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency declined to comment Monday on the survey results. However, they have in the past tried to address community banks' perception that they are expected to do stress testing,
The statement emphasized that community banks are not expected to do the type of stress testing that bigger banks do. But it said that all banks, regardless of size, "should have the capacity to analyze the potential impact of adverse outcomes on their financial condition."
Ashbaugh said that more and more community banks are taking this to mean that they should do some form of stress testing, even if it is as relatively straightforward as estimating the losses on a portfolio of riskier loans using standard models for losses.
"Regulators are generally pretty appreciative when community banks have been doing it, especially if they have not been asked," Ashbaugh said.
The Sageworks
Caveats aside, though, stress testing may prove to be like a lot of trends in banking: starting among the biggest banks, slowly trickling down to the smallest ones.
The study showed that overwhelmingly, community banks said examiners' main concern is asset quality, and the pressure to stress test may be a by-product of that concern. In addition, community banks have to run stress tests if they have high commercial real estate concentrations, and CRE lending has been on the rise over the past year.
Ashbaugh emphasized that for community banks, stress testing is more a matter of expectations than formal rules. Examiners are in most cases not requiring community banks to stress test, just informally asking them, he said.
However, when it comes to the examination process, "even if you're just being asked or recommended to do something, you're going to do something," he said.