Regional banks will be left out of the annual stress tests performed by the Federal Reserve, a top official said Monday. Big banks, however, will face even tougher requirements.
Federal Reserve governor Daniel Tarullo announced Monday in a speech delivered at Yale University that the agency is seeking to drop banks with less than $250 billion in assets from the requirement that they pass an annual stress test, an exercise that examines how a bank’s balance sheet would hold up in an hypothetical financial crisis. Banks that fall short can have their plans for paying out dividends to investors blocked by the Fed.
The $250 billion cutoff effectively would provide regulatory relief to regional banks, which are essentially banks that are bigger than community banks but simpler and smaller than megabanks. For example, the Atlanta-headquartered regional bank Suntrust would fall below the $250 billion line, while the global megabank HSBC would fall above it.
Tarullo said the Fed would submit an official notice on Monday for comments on a rule to relieve regional banks of the pass-or-fail part of the stress tests. “We now feel that they’re in a good place” to be monitored through normal supervision rather than the stress tests, Tarullo said.
Matt Well, a spokesman for the Regional Bank Coalition, said in a statement to the Washington Examiner that the group of regional banks “appreciates” Tarullo’s comments, but that his point highlights the need for more deregulation. “Stricter rules should be applied to the riskiest banks, but, simultaneously, the firms that present little or no risk should see significant regulatory reductions,” he said.
For megabanks, however, the tests are going to become more difficult, as the Fed will require them to pass the tests with a higher level of capital in order to have their plans for paying out investors approved, Tarullo said. Fed officials have hinted at such a change in recent months.
Tarullo said those and other updates to the stress tests are meant to “consciously [shape] them in accordance with the principle that financial regulation should be progressively more stringent for firms of greater importance, and thus potential risk, to the financial system.”
Bank stress tests have been carried out in various forms in the U.S. since 2009. The Fed views the tests as a success and a key factor in forcing banks to maintain higher capital levels — that is, to get more funding from ownership stakes and less from borrowing.
The industry, however, has argued that the stress tests, which change from year to year, are arbitrary and costly.
During a question and answer session, Tarullo acknowledged that banks might need to restructure or slim down in order to pass the stress tests. He said that making the tests more stringent as the financial crisis fades into the past is part of preventing catastrophic failures. “We can’t get complacent here,” he said.
