Fed issues capital plan rule, plans stress tests on largest banks

The Federal Reserve issued guidelines on Tuesday for 2012 capital plan reviews and plans a new round of stress tests on the nation’s 19 largest bank holding companies. The Fed adopted the capital plans rule, which takes effect Dec. 30, for bank holding companies with assets greater than $50 billion. The rule requires these large bank holding companies to develop and submit a capital plan to the Federal Reserve on an annual basis and to request prior approval from the Fed under certain circumstances before making a capital distribution. It issued its final rule Tuesday along with guidelines. Institutions will be required to submit their capital plans by Jan. 9, 2012. Stress tests, which are a part of the Fed’s capital plan reviews, will build on tests conducted earlier this year to ensure that institutions have capital planning processes that account for unique risks and ensure that institutions have sufficient capital to survive economic and financial stress, the Federal Reserve said. “Institutions will be expected to have credible plans that show they have sufficient capital so that they can continue to lend to households and businesses, even under adverse conditions, and are well prepared to meet regulatory capital standards agreed to by the Basel Committee on Banking Supervision as they are implemented in the United States,” the Federal Reserve said in a press statement. Banks will undergo a hypothetical stress scenario, that while not in the Fed’s forecast, would test a bank holding company’s ability to withstand a deep recession that includes contraction among other major economies, the Fed said. The nation’s six largest banking firms will be required to estimate potential losses stemming from a hypothetical global market shock. The global market shock will be based on market price movements seen during the second half of 2008, a time of significant volatility. Adjustments will be made to include sharp movements in European sovereign and financial sectors, the Federal Reserve said. Write to Kerry Curry. Follow her on Twitter @communicatorKLC.

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