The Federal Reserve moved Tuesday to rework the stress tests and capital requirements that apply to big banks, the first such significant revision of the post-crisis bank rules under President Trump.
The central bank’s Board of Governors asked for comment Tuesday on a proposal to combine a part of the capital rules that apply to big banks with the annual stress tests that the banks face. It said the proposal would increase capital requirements for the handful of megabanks, such as JPMorgan Chase and Goldman Sachs, while “modestly” lowering them for others.
“Our regulatory measures are most effective when they are as simple and transparent as possible, and this proposal significantly simplifies our capital regime while maintaining its strength,” Fed Vice Chairman for Supervision Randal Quarles said. “It is a good example of how our work can be done more efficiently and effectively, and in a way that bolsters the resiliency of the financial system.”
Each year since the crisis, the Fed has subjected the big banks to stress tests in which the central bank simulates a financial crisis and then examines what would happen to the banks’ balance sheets in that scenario. If the banks fail, they can be prevented from making payments to shareholders.
To pass the stress tests, banks must show they can maintain certain levels of capital during a crisis. Apart from the stress tests, the banks are subject to several other capital requirements. The proposal would partly merge those two requirements.
Capital requirements affect how banks fund their operations. Lower requirements mean that banks can fund their operations more through borrowing and debt. Higher requirements mean they must instead rely more on ownership stakes such as shares.
