Fed stress-testing expands to include 30 banks

126px-US-FederalReserveSystem-Seal.svg_3The Federal Reserve said last week that it would expand its stress-testing to include 30 banks next year—nearly twice the number tested last year.

Banks with over $50 billion in assets are required to under stress-testing to ensure they have adequate capital to withstand an economic downturn.

The institutions will also be required to submit capital plans by Jan. 6 that include transition requirements from the Basel III capital standards. The stress test will also focus on the institutions’ plans to issue dividend payments and repurchase stock.

The Fed said capital distributions will only be approved for institutions that have adequate capital plans.

“The aim of the annual reviews is to ensure that large financial institutions have robust, forward-looking capital planning processes that account for their unique risks, and to help ensure that they have sufficient capital to continue operations throughout times of economic and financial stress,” the Fed said. “Capital is important to banking organizations, the financial system and the economy broadly because it acts as a cushion to absorb losses and helps to ensure that losses are borne by shareholders, not taxpayers.”

The capital planning and stress-testing program launched after the financial crisis has led to a capital increase at the largest U.S. banking organizations. Eighteen bank holding companies raised their aggregate tier 1 common capital to $836 billion in the second quarter, compared to $392 billion in the first quarter of 2009—more than doubling the weighted average of the tier 1 common ratio from 5.3 percent to 11.1 percent.

Summary results for the stress-testing and capital plans will be published by the Fed in March. Next year, the Fed will, for the first time, publish the results of stress tests conducted under the adverse scenario.

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