The central bank in two adverse scenarios will gauge bank resilience against declines in the prices of high-risk, high-yield loans and debt and some high-priced real estate markets around the country, according to a statement released in Washington today. The central bank also inserted a test for large trading and clearing banks on counter-party default.
The Fed is using the tests, based on hypothetical adverse conditions instead of forecasts, to encourage the 30 biggest banks to build capital cushions against economic turmoil. The Fed said 12 of the banks will be subject to the capital review for the first time.
“The aim of the annual reviews is to ensure that large financial institutions have robust, forward-looking capital planning processes that account for their unique risks, and to help ensure that they have sufficient capital to continue operations throughout times of economic and financial stress,” the Fed said in the statement.
The 18 bank holding companies tested previously have increased their aggregate tier 1 common capital to $836 billion in the second quarter of 2013 from $392 billion in the first quarter of 2009, the Fed said in a press release. Their tier 1 common ratio, which compares capital to risk-weighted assets, has more than doubled to a weighted average of 11.1% from 5.3%, the Fed said.