The Federal Reserve released a roadmap of stress scenarios November 1, showing that banks should be prepared for sharp turns in the jobless rate and gross domestic product. The guidance is for the 30 US Comprehensive Capital Analysis and Review (CCAR) banks with $50 billion or more in total consolidated assets. The stress tests are a good reminder to treasurers that banks will continue to be sensitive partners when it comes to corporate services.
Of the scenarios, the Fed included one where banks should prepare themselves for a severe recession that would see the jobless rate jump 4 percentage points from current levels and a GDP level that plunges 4 ¾ percent within two years.
“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 in its statement.
To that end, banks should continue boosting tier 1 or high-quality capital levels, the Fed indicated. The Fed said that the original 18 bank holding companies (12 have been added for 2014) have increased their aggregate tier 1 common capital to $836 billion in the second quarter of 2013 vs. $392 billion in the first quarter of 2009. The tier 1 common ratio for these firms (ratio of high-quality capital to risk-weighted assets) more than doubled in that period to a weighted average of 11.1 percent from 5.3 percent, the Fed said.
Banks will also have to pass the tests in order to issue dividends or buy back stock.
While most of the big banks are now seasoned veterans at stress tests, some of their smaller banks, though similarly experienced, struggle to get them done. These are the banks that have between $10 billion and $50 billion, which the Fed said will also have to conduct the same stress scenarios. Many of these banks have complained that their smaller size makes it more difficult to dedicate the resources to the effort.
“The new stress testing requirements for many midsize banks will require the development of extensive data capabilities, new methodologies and robust policies, procedures and internal controls,” wrote Mary Frances Monroe, a senior director with Treliant Risk Advisors on AmericanBanker.com. “These requirements will prove challenging for many firms adapting to a raft of new prudential and consumer regulations and transitioning to the new capital framework.”