Fed’s Quarles sees 2019 as an ‘interim’ year for bank stress tests

By Trevor Hunnicutt and Jonathan Spicer

NEW YORK – U.S. bank stress tests conducted during an “interim” period this year will help the Federal Reserve decide what permanent changes to make to the closely followed examinations, the Fed’s point person on financial supervision Randal Quarles said on Wednesday.

On Tuesday the Fed said it would make its stress testing of large banks more transparent in 2019, providing financial firms significantly more information about how their portfolios would perform under potential economic shocks. The changes respond to long-running bank complaints that the current stress-testing process is cumbersome and opaque.

Less complex banks with assets between $100 billion and $250 billion, such as SunTrust Banks (NYSE:) and Fifth Third Bancorp (NASDAQ:), do not have to face 2019 stress tests, as the Fed is moving to a two-year cycle for testing those firms.

“Our challenge now is to preserve the strength of the test, while improving its efficiency, transparency, and integration into the post-crisis regulatory framework,” Federal Reserve Vice Chairman of Supervision Randal Quarles said in remarks prepared for delivery at a Council for Economic Education event in New York. “Our experience with this ‘interim’ year will inform the move to a permanently longer testing cycle – a change that would, of course, be subject to a full notice and comment process.”

The 2019 tests also include factoring in a jump to 10 percent unemployment from the current 4 percent rate, as well as elevated stress in corporate loan and commercial real estate markets in the most severe scenario.

The stress tests are a major yearly event for the largest banks, as they cannot distribute capital through dividends, share buybacks, or other investments without clearing that Fed hurdle. Thirty-four lenders passed the test last year, while Goldman Sachs (NYSE:) and Morgan Stanley (NYSE:) received conditional approvals that limited their capital distributions. The U.S. subsidiary for Deutsche Bank (DE:) had its capital plan rejected by the Fed.

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