Big banks to hold more capital if buffers included in stress tests -U.S. analysts

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By Lisa Lambert | WASHINGTON

WASHINGTON Including funds that banks set aside
to cover potential losses, known as capital buffers, in the
annual stress tests that U.S. regulators administer to financial
institutions would lead to big banks holding more capital, the
federal office that monitors risks to the financial system said
on Tuesday.

Each year, the largest banks such as Goldman Sachs
and Wells Fargo demonstrate in the tests how they would
withstand crises of varying magnitudes and possibly undergo
bankruptcy without using a federal bailout.

In September, Federal Reserve Governor Daniel Tarullo said
the central bank was considering factoring in capital buffers,
which correlate to banks’ sizes and are currently being phased
in for U.S. institutions. All banks must keep at least one
capital buffer, mid-sized banks two and the biggest banks that
are considered important to the global financial system three.

The Office of Financial Research, which provides data and
analysis to all U.S. banking regulators, found including the
buffers for large banks in the stress tests “would result in the
biggest U.S. banks holding more capital, all else being equal.”

It noted the banks would not be allowed to hypothetically
tap the buffers to pass the tests.

Meanwhile, “if buffers are not included in the stress tests,
the tests could have a bigger impact on less systemic banks.”

Because capital buffers are “needed most at the worst
moments of economic turmoil,” requiring the most influential
banks to keep their buffers intact during stress tests “would
make the financial system more resilient under extreme stress.”

But, OFR added, it would also result in banks having to hold
onto more capital during better times.

Federal regulators are looking into modifying stress tests
and other requirements to ease up on small banks and create
greater oversight of large ones.

Another possible change to the tests – assuming banks’
lending would stop growing during times of severely adverse
stress – could limit their capital available to extend new
credit under stress, OFR said.

It also found that having a “static balance sheet” could
overstate banks’ resilience and would not take into account the
risks posed by unplanned growth in their balance sheets, such as
a loan pipeline backup.

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