Four years after the banks entered their worst time in decades, regulators are trying to ensure they would be able to spot vulnerable institutions ahead of time. This is why the U.S. Federal Deposit Insurance Corporation has issued a proposal to have banks with more than $10 billion in assets pass annual stress tests.
Part of the Dodd-Frank Wall Street Reform and the Consumer Protection Act, the proposal the Federal Deposit Insurance Corporation has come forward with should teach banks how to protect themselves against financial crisis and bad management decisions.
Acting Federal Deposit Insurance Corporation (FDIC) chairperson Martin J. Gruenberg said: “Both the FDIC and the institutions being tested will benefit from the forward-looking results that the stress tests will provide”.
The tests and their findings should give regulators a better view and understanding of what’s going on. The tests are designed to see whether or not banks have enough cash and other securities on balance sheets to keep them strong and secured from risky loans and another financial meltdown.
There will be 31 banks that will have to send in their capital plans for review and tests. Six of the largest banks with big trading operations will have to undergo the toughest tests.
According to FDIC’s proposal, there will be stress tests based on three scenarios which the regulator will offer based on each bank’s financial data. Using a bank’s financial data on September 30, all the lending institutions targeted will receive the stress test scenarios by November.
Gruenberg explained that the results are going to “assist in ensuring an institution’s financial stability by helping to determine whether it has sufficient capital levels to withstand a period of economic stress”.
Richard Cordray, director of the Consumer Financial Protection Bureau (CFPB), manifested official support towards the proposal, saying that it will not only “help protect consumer depositors but the system as a whole”. Cordray, the newly appointed chief at the CFPB, has also stated “it is helpful that the banking agencies are working together to present a uniform presentation to the big banks in their jurisdictions.
Interesting enough is that the Federal Reserve has already tested the 19th largest U.S. banks with assets of more than $50 billion.