Fed exempts most regional banks from stress testing in 2019

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WASHINGTON — The Federal Reserve on Tuesday agreed to exempt banks with assets of $100 billion to $250 billion from the 2019 supervisory stress testing cycle, an announcement tucked into a suite of other changes unveiled to provide greater transparency to its stress testing regime.

The news came as part of a multifaceted release from the central bank on stress testing-related issues, including the 2019 scenarios. Toward the bottom of that release, the Fed said that it would be “providing relief to less-complex firms” by effectively moving them off the 2019 Comprehensive Capital Analysis and Review stress testing cycle and requiring them to undertake supervisory stress testing in 2020.

“The Board announced that it will be providing relief to less-complex firms from stress testing requirements and CCAR by effectively moving the firms to an extended stress test cycle for this year,” the Fed’s press release said. “The relief applies to firms generally with total consolidated assets between $100 billion and $250 billion.”

The Fed said the banks that do not have to undertake a 2019 stress testing cycle would still be subject to the results of the 2018 stress test, meaning that capital disbursements would still be restricted if supervisors observed outflows out of line with the firms' existing capital plans. Letters to the individual firms detailing these constraints would be published promptly, a Fed spokesperson said, but were not ready for publication along with the rest of the release.

The firms covered by the statement are Ally Financial, American Express Company, BB&T, Citizens Financial, Discover Financial, Fifth Third Bancorp, Regions Financial Corp., Huntington Bancshares, KeyCorp, M&T Bank, SunTrust, BBVA Compass Bancshares, BMO Financial, BNP Paribas, MUFG Americas, RBC U.S. Group and Santander Holdings USA.

Banks had urged the Fed to exempt banks with $100 billion to $250 billion of assets from the 2019 stress testing cycle in their comments to the agency last month related to a pending series of proposed changes to enhanced prudential standards for large banks.

The Fed's 2019 stress testing scenarios were notable in their own right, including a severely adverse scenario that sees a 6-point increase in unemployment and harsher macroeconomic conditions than those featured in last year’s scenario.

“The hypothetical scenario features the largest unemployment rate change to date,” said Fed Vice Chairman for Supervision Randal Quarles. “We are confident that this scenario will effectively test the resiliency of the nation’s largest banks.”

The scenarios also include a 50% drop in stock values, a 70% increase in the VIX market volatility index, a 25% drop in home values and a 35% drop in commercial real estate values, as well as severe recessions in the eurozone, the U.K. and Japan.

The Fed also finalized a series of changes originally proposed in December 2017 meant to make the Fed’s stress testing models and particularly the process by which it arrives at its severely adverse scenarios more transparent.

The agency’s Board of Governors unanimously adopted the changes, which will apply beginning with the 2019 stress testing cycle.

The Fed will now provide banks with ranges of loss rates for actual loans held by CCAR firms, as well as portfolios of hypothetical loans with loss rates calculated using the Fed’s proprietary models. Certain equations and key variables that had not previously been known will also be disclosed, the Fed said.

“Using this additional information, the firm would be better able to evaluate the risks in its own portfolio or compare the losses from its own models to losses from the board’s models,” the Fed said in an accompanying release. “In response to comments received … the board will provide additional information on a number of models, including those used to project operational-risk losses and pre-provision net revenue.”

The Fed also included a “stress testing policy statement” that explains the Fed’s “approach to model development, implementation and validation” and a revised stress test scenario framework document.

The Fed’s prior stress testing framework requires that unemployment in the severely adverse scenario be raised by 3% to 5%, but that if underlying unemployment is low, the rate must be increased to at least 10%.

Among the changes to the prior statement is a provision that would allow the Fed to push up the unemployment rate less than 4% if the “unemployment rate at the start of the scenarios is elevated but the labor market is judged to be strengthening” and related credit losses were already wending their ways through banks’ balance sheets.

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Stress tests Minimum capital requirements Regional banks Randal Quarles Federal Reserve Ally Financial BB&T Fifth Third