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More banks face stress test obligation

by Ira Teinowitz in Washington | Published January 18, 2012 at 1:31 PM

The Federal Deposit Insurance Corp. on Tuesday, Jan. 17, moved to fill in some of the regulatory differences between the giant financial institutions and those that are just plain ole' large by proposing annual internal stress test requirements for large banks that aren't already covered by similar Federal Reserve requirements.

The FDIC proposal would apply to 23 state nonmember banks that each have more than $10 billion in assets. It sets out a stress test regime similar to that the Fed adopted for bank holding companies with $50 billion in assets, though those also face additional requirements and consequences -- the Fed can block dividend increases at holding companies that show troubling stress test results. The stress tests were required by the Dodd-Frank Act.

The Office of Comptroller of the Currency is due to approve similar requirements for the large national banks it regulates on Wednesday.

The internal stress tests required by both the FDIC and at the OCC will operate in similar fashion to predict whether an institution can weather severe economic downturns or financial crisis.

Each year by mid-November, regulators will develop three scenarios for the economy -- a baseline, a moderately severe and a very severe version of prospective events -- and "large" financial institutions would then have to demonstrate that they have the capital in place to manage through any of the scenarios for the next two years.

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Banks would have to report the test results to regulators by Jan. 5 and disclose summary results publicly within 90 days. How the public reporting would take place still hasn't been determined.

FDIC officials said Tuesday that bank regulators have taken a number of steps to ensure that all three regulators apply consistent standards.

The FDIC on Tuesday also approved a final rule requiring insured depository institutions with more than $50 billion in assets to develop living will resolution plans that describe plans for their breakup in the event of major financial woes under the FDIC Act.

The parent bank holding companies also have to develop living will resolution plans under the Bankruptcy Act, but any insured depository would be resolved under the FDIC Act.

FDIC officials said the rule would cover 37 depository institutions.

The FDIC in September proposed an interim rule. The FDIC said the final version made the rule and some deadlines more consistent with rules the Federal Reserve applied to the giant institutions.

Banking lawyers said that the FDIC's action was no surprise, but reiterated the future importance of stress tests in the future.

"It's complementary. Big banks have to do it at the holding company level. It's nothing new to these banks," said Thomas P. Vartanian, a partner at Dechert LLP. "Whether you do it in the back door [holding companies] or the front door [the insured depositories], you have to do it."

He said the separate living wills for the banks and the holding companies will allow regulators to "figure out if there is any daylight in between" the two that could offer potential problems.

Tuesday's FDIC meeting was the first that included Richard Cordray, who was appointed by President Obama to head the Consumer Financial Protection Bureau.

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