FED unveils new stress tests plan

By Alan Zibel, WSJ
The U.S. Federal Reserve on Tuesday outlined plans for annual tests of the financial strength of the largest U.S. banks and said some of the results would be made public.

Banks must submit their plans to the Fed by Jan. 9 for the “stress tests,” which apply to 19 firms that participated in similar tests earlier this year and 12 more with at least $50 billion in assets that have not participated in similar tests before, the Fed said.

The Fed said the banks would have to test their ability to withstand a scenario of a new recession beginning at the end of this year, with an increase in unemployment to above 13% in early 2013 and “a sizable shortfall in U.S. economic activity and employment, accompanied by a notable decline in global economic activity.”

The goal is to “ensure that institutions have robust, forward-looking capital planning processes that account for their unique risks,” the Fed said in a statement.

The Fed has conducted two rounds of special stress tests for the nation’s largest banks, which have been deemed crucial to the health of the financial system.

The first round, in spring 2009, acted as a public confidence-boosting exercise and allowed banks to repay money they received from the Treasury Department’s Troubled Asset Relief Program.

The second round, completed in March, cleared the way for some banks to immediately boost dividends to shareholders. However, some weaker institutions were not approved. Bank of America Corp., for example, had its request for a dividend increase turned down.

Bankers want to use spare cash to placate investors, but the Fed said it will only allow them to do so if they can demonstrate that they are financially strong.

The central bank said it “will approve dividend increases or other capital distributions only for companies whose capital plans are approved by supervisors and are able to demonstrate sufficient financial strength” to withstand a time of market stress.

When the stress tests are complete, the Fed said it will publicly disclose its estimates of bank revenue and losses and estimates of bank capital ratios for the 19 largest firms.
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