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Fed Announces New Stress Tests for Biggest Banks

Wednesday, 17 Nov 2010 | 5:27 PM ET

The Federal Reserve just issued notice that the 19 banks that were subject to stress tests in May of 2009 will have to perform another round of stress testing.

Officially, the new stress tests are only mandatory for banks that plan to increase their dividend or conduct stock repurchases. But the Fed makes it pretty clear that all 19 banks should submit “comprehensive capital plans” by January 7 of next year.

“SCAP BHCs are encouraged to have their capital plans filed by January 7, 2011, irrespective of whether they intend to undertake any capital distributions,” the Fed writes.

By the way, the letter is full of that kind of mumbo-jumbo. SCAP BHCs are—if I have this straight—Bank Holding Companies that were subject to the Supervisory Capital Assessment Program.

You can download a pdf of the Fed’s “Revised Temporary Addendum” letter to the banks.

The Fed’s website has a handy summary, explaining that the new tests are intended to measure:

  • The firm's ability to absorb losses over the next two years under several scenarios, including an adverse macroeconomic scenario specified by the Federal Reserve and adverse scenarios appropriate for a particular firm's business model and portfolios;
  • how the firm will meet Basel III capital requirements as they take effect in the United States, in the context of the proposed capital distributions as well as any anticipated impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act on the firm's business model or capital adequacy; and
  • the firm's plans to repay U.S. government investments, if applicable. BHCs are expected to complete the repayment or replacement of any U.S. government investments in the form of either preferred shares or common equity prior to increasing capital payouts through higher dividends or stock buybacks.

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