BHCs Instructed to Conduct First Round of Mid-Cycle Stress Tests

This month the Federal Reserve instructed 18 Bank Holding Companies (BHCs) to conduct their first biannual Mid-Cycle Stress Test in compliance with the Dodd-Frank Act.  While the Federal Reserve has conducted its own stress tests since 2009, this is the first time firms will conduct the test based on their “own processes and analyses.”

Each BHC must develop three scenarios and submit a report by July 5, 2013.  The baseline scenario, adverse scenario, and severely adverse scenario projections will be based on firm-specific qualitative and quantitative information.  Qualitative factors include events that affect “firm-wide activities and risk exposures,” such as macroeconomic events and changes in the marketplace.  Quantitative factors include summaries of estimated losses, resources available to absorb those losses, balance sheet positions, and capital compositions on a quarterly basis.  In addition, each BHC is “required to disclose a general description of the methodologies used” in conducting its stress test.

Each BHC must publish their severely adverse scenario projection.  This comprehensive and public self-assessment is “intended to promote market discipline and facilitate an understanding of the financial conditions and risks of the companies.”  The Federal Reserve wants to ensure that firms have “robust capital planning processes and adequate capital” so that they can “continue to lend to households and businesses even during adverse economic and financial circumstances.”

The 18 BHCs participating are Ally Financial Inc.; American Express Company; Bank of America Corporation; The Bank of New York Mellon Corporation; BB&T Corporation; Capital One Financial Corporation; Citigroup Inc.; Fifth Third Bancorp; The Goldman Sachs Group, Inc.; JPMorgan Chase & Co.; KeyCorp; Morgan Stanley; The PNC Financial Services Group, Inc.; Regions Financial Corporation; State Street Corporation; SunTrust Banks, Inc.; U.S. Bancorp; and Wells Fargo & Company.