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New Fed Rule Means Capital Plans, Stress Tests for Banks

Under a final rule, banks with $50 billion or more in assets will need to submit capital plans to the ""Federal Reserve"":http://www.federalreserve.gov/, which will also begin performing stress tests for the largest financial institutions next year.


The Fed said in a statement that the capital plans are intended ""to ensure that institutions have robust, forward-looking capital planning processes that account for their unique risks, and to help ensure that institutions have sufficient capital to continue operations throughout times of economic and financial stress.""

In accordance with the rule, the Fed will take responsibility for annual evaluations of each institution's capital adequacy, internal assessment processes, and capital distribution plans, including dividend payments and stock repurchases.

It is difficult to undervalue the importance of the Fed's role in supervising capital plans. The central bank more


recently denied life insurer ""MetLife"":http://www.metlife.com/ the ability to move forward with capital distribution plans and stock repurchases it had proposed earlier this year.

Nineteen of the largest financial institutions around the U.S. will also fall under annual stress tests, which begin under the Federal Reserve this year, in line with the Comprehensive Capital Analysis and Review (CCAR).

The Fed will offer up stress tests that hew closely to the capital reserves reported by financial institutions, and deploy the same standards provided by the Basel Committee.

Financial institutions will need to begin submitting their capital plans by January 2012, following the rule's enactment in late December this year.

Earlier Tuesday the Fed also released minutes from the last Federal Open Market Committee meeting that detailed considerable discussion about further quantitative easing, among other policy options, as still-weak housing markets kept a heel on the overall economic recovery.

""Housing market activity remained very weak, held down by the large overhang of foreclosed and distressed properties along with limited demand in an environment of uncertainty about future home prices and tight underwriting standards for mortgage loans,"" the Fed minutes read.

""Although starts and permits for new single-family homes edged up in September, they stayed near the depressed levels seen since the middle of last year,"" the minutes added. ""Sales of new and existing homes continued to be soft in recent months, and home prices trended lower.""

About Author: Ryan Schuette

Ryan Schuette is a journalist, cartoonist, and social entrepreneur with several years of experience in real-estate news, international reporting, and business management. He currently lives in the Washington, D.C., area, where he freelances for DS News and MReport.

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