Wednesday, November 23, 2011

FED Stress Test

See FRB announcement last nite.

What it involves?
BHC (Bank Holding Cos) or FIs (Financial Insitutions) with total consolidated assets > USD 50 b

1) To ensure FIs have robust, forward-looking capital planning processes that account for their unique risks, and to help ensure that institutions have sufficient capital to continue operations throughout times of economic and financial stress.
2) Institutions will be expected to have credible plans that show they have sufficient capital so that they can continue to lend to households and businesses, even under adverse conditions, and are well prepared to meet regulatory capital standards agreed to by the Basel Committee on Banking Supervision as they are implemented in the United States.
3) Boards of directors of the institutions will be required each year to review and approve capital plans before submitting them to the Federal Reserve

Required under the newly legislated Dodd Frank Act.
- the Federal Reserve annually will evaluate institutions' capital adequacy, internal capital adequacy assessment processes, and their plans to make capital distributions, such as dividend payments or stock repurchases.
-the Federal Reserve will approve dividend increases or other capital distributions only for companies whose capital plans are approved by supervisors and are able to demonstrate sufficient financial strength to operate as successful financial intermediaries under stressed macroeconomic and financial market scenarios, even after making the desired capital distributions.

-  the 19 firms* that participated in the CCAR in 2011, also the same 19 that took part in SCAP for TARP.
-  12 additional firms** with at least $50 billion in assets that have not previously participated in a supervisory stress test exercise.

Tests A : Instructions for the 19 firms
Tests B: Instructions for the 12 aditional firms

Tests A are considered one of the most stringent Stress Tests to-date.
Hypothetical stress scenario:
Unemployment  at 13 %
US GDP  fall 8%

Tests B are  scaled-back tests on the capital plans of 12 more financial firms  and considered less complex.

* The 19 bank holding companies participating in the 2012 CCAR are:
Ally Financial Inc., American Express Company, Bank of America Corporation, The Bank of New York Mellon Corporation, BB&T Corporation, Capital One Financial Corporation, Citigroup Inc., Fifth Third Bancorp, The Goldman Sachs Group, Inc., JPMorgan Chase & Co., Keycorp, MetLife, Inc., Morgan Stanley, The PNC Financial Services Group, Inc., Regions Financial Corporation, State Street Corporation, SunTrust Banks, Inc., U.S. Bancorp, and Wells Fargo & Company. These 19 firms also participated in the 2011 CCAR and the 2009 SCAP.

**The 12 bank holding companies participating in the CapPR are:
 BBVA USA Bancshares Inc., BMO Financial Corp., Citizens Financial Group Inc., Comerica Inc., Discover Financial Services, HSBC North America Holdings Inc., Huntington Bancshares Inc., M&T Bank Corp., Northern Trust Corp., RBC USA Holdco Corp., UnionBanCal Corp., and Zions Bancorporation.

3Q2011 to 4Q2013  with exception for trading and counterparty positions according to the Basel III and DoddFrank schedules.

1)  Key purpose, here is transparency in a time of great uncertainty.
Transparency breeds  and bolsters confidence and keeps out nasty "rumors" about BHCs  B/S exposure to assets in the Eurozone.

2) It will put the burden on the affected BHCs to prove they can make a capital distribution (aka dividends), NOT on the Fed to block it-------likely that BofA and CitiGroup will have to pare down dividends as a result!!

3) Tests B are NOT required under the Dodd Frank Act as these FIs are under the USD 50b cap.
Nevertheless, if they have to go to the FED for aid in a crisis they have to satisfy the tests requirements; and the FED seems to be very prudent and cautious in including these other 12.

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