By Jeff Bater
Sept. 26 — Midsize banks such as BB&T, SunTrust, Fifth Third and Regions would receive less scrutiny from the Federal Reserve under proposed changes to the annual stress tests required of systemically important financial institutions.
Banks with less than $250 billion in assets would be exempt from the qualitative review portion of the Comprehensive Capital Analysis and Review, Fed Governor Daniel Tarullo said in a Sept. 26 speech. The regulator also wants to reduce the amount of data midsize banks are required to submit for the purpose of running the stress test.
The changes would apply to midsize or regional banks under the $250 billion threshold “that do not engage in significant international or nonbank activity,” Tarullo said. Larger banks would be subject to more rigorous testing and capital requirements under other elements of the Sept. 26 proposal.
“We do not intend for less complex firms to invest in stress testing capabilities on par with the most complex firms and, given their profile, we feel these firms can maintain the progress they have made through the normal supervisory process, supplemented with targeted horizontal reviews of discrete aspects of capital planning,” he said.
Ian Katz, an analyst at Capital Alpha Partners, said in a note the proposed move should be positive for such banks as BB&T, SunTrust, Fifth Third, Regions, M&T, KeyCorp, Huntington Bancshares, Comerica and Zions.
Tarullo made clear in his remarks that those midsize banks would still be included in the quantitative side of the annual stress tests.
“As Tarullo indicated, this is not a panacea for regional banks,” Cowen and Company analyst Jaret Seiberg said in a note about the speech. “They would still need to do stress testing as the Dodd-Frank stress testing kicks in at $50 billion of assets. And they would still run a CCAR stress test, though it would generally be easier to pass than the current test.”
Each year, the Fed and the firms it supervises conduct Dodd-Frank Act stress tests to help assess whether those institutions have sufficient capital to absorb losses and support operations during adverse economic conditions.
The CCAR is a complement to those stress tests. It evaluates the capital planning processes and capital adequacy of banks with assets above $50 billion, including the firms' planned capital actions such as dividend payments and share buybacks and issuances. When considering a firm's capital plan, the Fed considers both quantitative and qualitative factors.
Quantitative factors include a firm's projected capital ratios under a hypothetical scenario of severe economic and financial market stress. Qualitative factors include the strength of the firm's capital planning process, which incorporate the risk management, internal controls, and governance practices that support the process.
The regulator may object to a capital plan based on quantitative or qualitative concerns. If the Fed objects to a capital plan, a firm may not make any capital distribution unless expressly authorized by the supervisor.
“We take his comments as indicating that regional banks will get more control over their distributions, including over dividend rates,” Seiberg wrote. “That is a clear plus for regional banks and should open the door for them over the next few years to return more than 100% of earnings.”
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