Fed finalizes qualitative stress test changes

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WASHINGTON – The Federal Reserve Board on Monday approved a proposal designed to exempt most of the 33 banks subject to annual stress testing from the “qualitative” aspects of the test, a major regulatory change for the banks concerned.

Fed Gov. Daniel Tarullo announced in September that the central bank intended to relieve banks with less than $250 billion in assets or $10 billion in foreign assets from the qualitative aspect of the annual Comprehensive Capital Analysis and Review stress test. That criterion is in line with the Fed’s thresholds for banks to attain “advanced approaches” status – a designation that the banks themselves are beginning to reconsider.

The final version of the rule dropped the $10 billion foreign asset threshold, effectively exempting two additional banks – American Express FSB and Northern Trust – from the qualitative CCAR test. Of the 33 banks subject to CCAR stress tests, 20 will be exempt from the 2017 qualitative test under the new rule.

Banks must also have less than $75 billion in nonbank assets and not be designated as global systemically important institutions to qualify for the exemption, according to the Fed release.

CCAR and its counterpart, the Dodd-Frank Act Stress Test, or DFAST, are among the most potent supervisory tools to have emerged since the financial crisis. Dodd-Frank requires all banks designated as systemically important financial institutions (those with assets of more than $50 billion) to undergo both tests.

The tests involve running a bank’s balance sheet through a hypothetical series of stress scenarios over the course of nine consecutive quarters. Banks whose capital reserves fall below the mandatory levels in the quantitative CCAR test may be unable to pay dividends until they can demonstrate that their capital allocations can withstand the tests.

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Stress tests Federal Reserve