Banks Pass Stress Tests (Jul. 3)

Update 188 — Banks Pass Stress Tests; Will the Tests Themselves Be Tested?

Last Thursday, the Federal Reserve released its qualitative analysis upon reviewing the Comprehensive Capital Analysis and Review (CCAR) stress test results from the week be fore.  The analysis is the basis for the Fed’s verdict regarding the capital status of the nation’s 34 banks with consolidated assets in excess of $50 billion.

33 of the 34 firms are free to pursue their corporate finance plans for the next year without constraints on stock repurchases or dividend policy under DFA section 165 (d).  The Fed granted a conditional OK to Capital One; the firm may fix insufficiencies in its capital planning practices and submit a plan in six months.

CCAR and DFAST, the Dodd-Frank mandated capital regime stress tests, have been conducted annually since the recession.  Policymakers have considered making adjustments to both programs. What are implications for the DFA reform process on stress testing, given that almost every bank passed this year?

Happy 4th,

Dana

——————

2017 CCAR Results

The capital plans of all 34 banks subject to CCAR were given the OK by the Federal Reserve for the first time in CCAR’s eight-year history.  Capital One earned a conditional non-objection and must submit again in six months. American Express made minor adjustments to its plan to pass the test.

History of CCAR Results

CCAR has been a critical program to motivate balance sheet accountability among large banks and confidence in them post crisis.  Without CCAR, the largest banks would have not have built and maintained the safe capital regimes they now have.  Second, without regular testing, banks may assume others will pick up the costs or they will be bailed out again.

At the nadir of the recession in the spring of 2009, regulators subjected the largest banks to the first US regulatory-administered round of stress tests (until 2007, stress testing was typically administered internally by banks for self-assessment purposes).  In announcing the results of the Supervisory Capital Assessment Program that March, the Fed forced hundreds of institutions to raise or receive injections of more capital.  The beginning of the recovery was marked by this announcement in March 2009, as firms saw other institutions’ actual capital conditions for the first time.  Confidence rose from that point in banks’ liquidity and ability to make payments.  Before then, institutions were not making overnight payments to close books on transactions.

Every year since, US firms have substantially increased their capital buffers and quality.  Specifically, the largest banks have increased capital levels to $1.2 trillion from $500 billion in 2009.   Per the Fed: “The common equity capital ratio–which compares high-quality capital to risk-weighted assets–of the 34 bank holding companies in the 2017 CCAR has more than doubled from 5.5 percent in the first quarter of 2009 to 12.5 percent in the first quarter of 2017.”

This is the first year since the recession that the Fed has cleared all big banks capital return plans. CCAR stress testing has provided a good indicator for the financial system’s health. The GOP may argue that these results undermine the necessity of the test.

Consequences of Test Results

Following last week’s results, the nation’s four largest banks announced they will devote $44 billion to stock buybacks — $15 billion more than last year, boosting the price of their stock.  Other firms also announced they will proceed with buybacks and dividend payment plans held in abeyance until this announcement.

Progressives might argue that increased buybacks constitute irresponsible shareholder-enrichment and the abandonment of lending and investment in the middle class. We often hear compliance costs of regulation curtail lending that would benefit communities, but wouldn’t a redirection of stock buybacks toward lending serve a greater purpose? A neutral assessment might pay respect to firms for adjusting their planning in accordance with Fed’s evaluation.

Qualitative vs Quantitative Results

CCAR consists of two reviews, qualitative and quantitative.  The results of the quantitative review, which evaluates capital adequacy were released June 22. This review evaluates firms’ capital finance plans.

In late January, the Fed announced the exemption of some large and complex firms from the qualitative review, and would focus them solely on the largest SIFIs.  The Fed specifically exempted BHCs with assets totaling between $50 billion and $250 billion (regional banks), total nonbank assets of less than $75 billion, banks with less than $10 billion in foreign exposure and banks that are not identified as global systemically important banks (GSIBs). SIFIs with over $250 in assets are still subject to the qualitative evaluation.

Treasury made two proposals regarding the qualitative component of CCAR:

  •  the qualitative portion should no longer serve as the sole basis for the Federal Reserve’s objection to a capital plan.
  •  the  qualitative assessment should be adjusted to conform to the horizontal capital review standard the Federal Reserve has already implemented for non-complex banking groups with assets less than $250 billion.

Republican Strategy

Republicans may point to the health of the banks to justify proposals to end or limit CCAR requirements for some of the smaller of the 34 banks, including at least a change in the $50 billion threshold for CCAR testing. The GOP’s operative logic — because CCAR requirements are working so well, we no longer need them.  Per Ranking Member of Senate Banking Sherrod: “If no one fouls out in a game, you don’t fire the referees.”   This is  flawed reasoning.  If anything, the results prove how well CCAR has worked for so long as a key diagnostic for the state of the financial system’s health.

Republicans have also sought changes to CCAR transparency that would, first, open public comment for rule-writing to financial institution lobbyists and, second, make the Fed’s CCAR methodology public so SIFI’s can be cued to what will be factored into the CCAR process.

Democratic Calculus

DFA supporters viewed the test results as a validation of the regulatory regime.  If Republicans are pushing heavily for some relief, Democrats could offer adjusting CCAR in exchange for preserving an automated SIFI Threshold. An automated SIFI threshold would mean that any bank that crosses the threshold would automatically be designated and subject to heightened systemic risk safeguards.

One reform under discussion would be to reduce  the frequency of DFAST stress tests for mid sized banks, those $10-50 billion in assets.  Sens.  Heitkamp and Tester have introduced a bill proposing  another change.  S. 1139, the Main Street Regulatory Fairness Act, would make the DFAST tests less frequent and increasing the asset threshold for such testing from $10 billion to $50 billion.  The proposal found its way into Treasury’s report.

Critics of this measure say it gives discretion on the matter to regulators, who will likely be Goldman and Trump loyalists within a few years.  But by offering some adjustment to CCAR that already has much support and does not increase systemic risks, Democrats can secure an off-setting protection.

Stress Tests and Talks

This year’s almost universally positive CCAR results means that negotiating parties may be tempted to use CCAR as a bargaining chip in a broad discussion of financial reform tweaks.  Negotiators will explore what changes to CCAR and DFAST improve or diminish bank performance.  Banks have certainly gotten better at understanding and passing these evaluations every year.  The value of these tests could be seen as diminishing annually.  As firms are more practiced and doing better, results are more uniform, and compliance costs are sunk or cut.

Democrats may add offerings adjusting the program in the area of frequency, the threshold level at which it applies, and the transparency of the process.  If enough Democrats conclude it is not costly to, for example, exempt firms with around $10 billion in assets from DFAST, the party could posture the change as a substantial concession.  Compliance costs are more significant for those firms – which are not systemically important – relative to the gigantic firms.

It is easy to imagine discussions regarding the tests’ qualitative review for banks of particular sizes, enabling Democrats to yield here in exchange for the preservation of a progressive sacred cow DFA provision to be named later.

36 thoughts on “Banks Pass Stress Tests (Jul. 3)”

  1. I am glad for writing to make you know what a magnificent encounter my friend’s girl gained studying your web site. She learned plenty of pieces, which include what it’s like to possess an awesome helping nature to let other folks very easily know just exactly several multifaceted subject matter. You truly exceeded people’s expectations. Thank you for presenting these powerful, safe, explanatory and in addition fun tips about this topic to Julie.

  2. My partner and I absolutely love your blog and find a lot of your post’s to be just what I’m looking for.
    Does one offer guest writers to write content for you personally?
    I wouldn’t mind producing a post or elaborating on some of the subjects you write related to here.
    Again, awesome web log! asmr 0mniartist

  3. It’s nearly impossible to find experienced people on this topic, however, you sound like you know
    what you’re talking about! Thanks 0mniartist asmr

  4. What’s up to every body, it’s my first pay a visit of this website; this web
    site contains remarkable and in fact fine data for readers.
    0mniartist asmr

  5. It’s amazing to go to see this website and reading the
    views of all colleagues about this article, while I am also zealous of getting knowledge.

  6. Someone necessarily assist to make severely articles
    I might state. That is the first time I frequented your website page and thus far?
    I surprised with the analysis you made to make this actual post incredible.
    Great process!

  7. Thank you for the good writeup. It actually was a amusement account it.
    Look complex to more introduced agreeable from you!
    By the way, how can we keep up a correspondence?

  8. What’s up to every one, the contents existing at this web page
    are really remarkable for people knowledge, well, keep up the nice work fellows.

  9. If you wish for to improve your familiarity simply keep visiting this web site and be updated with the
    latest information posted here.

  10. scoliosis
    Thanks , I have recently been looking for info about this subject for a while and
    yours is the best I’ve came upon till now.
    However, what about the bottom line? Are you sure in regards to the source?
    scoliosis

  11. scoliosis
    Wow, awesome blog layout! How long have you been running a blog for?

    you make running a blog look easy. The total look of your website is excellent, as
    well as the content!
    scoliosis

  12. I absolutely love your site.. Pleasant colors & theme.
    Did you create this web site yourself? Please reply
    back as I’m trying to create my own personal website and would love to find out where you got this from or just what the theme
    is named. Many thanks!

  13. Howdy terrific website! Does running a blog similar to this require
    a massive amount work? I’ve virtually no knowledge of coding however I had been hoping to start my own blog
    in the near future. Anyways, should you have any ideas
    or tips for new blog owners please share. I know this is off topic however I just wanted to ask.

    Cheers!

  14. I loved as much as you will receive carried out right here.
    The sketch is tasteful, your authored subject matter stylish.
    nonetheless, you command get bought an impatience over that you wish be
    delivering the following. unwell unquestionably come further formerly again since exactly
    the same nearly a lot often inside case you shield this hike.

  15. Hi! I just wanted to ask if you ever have any problems with hackers?
    My last blog (wordpress) was hacked and I ended up losing many months of
    hard work due to no data backup. Do you have any solutions to stop hackers?

  16. Excellent blog here! Also your site loads up very fast!
    What host are you using? Can I get your affiliate link to your host?

    I wish my website loaded up as fast as yours lol

  17. I believe that is among the such a lot significant information for me.
    And i’m glad studying your article. However
    should observation on some general things, The website taste is ideal,
    the articles is truly excellent : D. Just right process, cheers

  18. First off I would like to say fantastic blog! I had a quick question which I’d like to ask if you do not mind.
    I was interested to know how you center yourself and clear your mind before writing.

    I’ve had trouble clearing my thoughts in getting my thoughts out there.
    I do enjoy writing however it just seems like the first 10 to 15 minutes tend to be lost simply just trying to figure out how to
    begin. Any recommendations or tips? Cheers!

  19. I’ve been exploring for a little bit for any high quality articles or weblog posts in this sort of
    space . Exploring in Yahoo I finally stumbled upon this site.
    Reading this info So i’m happy to convey that I’ve a very excellent uncanny feeling I
    discovered just what I needed. I most definitely will
    make certain to do not overlook this web site and give it a glance regularly.

  20. Hi, I do think this is an excellent website. I stumbledupon it
    😉 I am going to return yet again since I book marked it.
    Money and freedom is the best way to change, may you be rich and
    continue to guide other people.

  21. I got this site from my pal who told me regarding this web page and now this time I am visiting this
    site and reading very informative content at this place.

  22. Everything is very open with a very clear description of the issues.
    It was truly informative. Your site is very helpful.
    Thanks for sharing!

  23. You’re so cool! I do not believe I’ve truly read through something like this before.

    So great to find somebody with a few genuine thoughts on this
    issue. Seriously.. thanks for starting this up.
    This website is one thing that’s needed on the internet, someone with some originality!

Leave a Reply to free dating sites why

Your email address will not be published. Required fields are marked *