In connection with instructing BHCs not to make any capital distributions without prior FRB approval, the Federal Reserve has laid out a new stress test that the largest nineteen banks subject to the 2009 exercise1 must undertake. The test will guide the Board’s assessment of not only whether a BHC may engage in a capital distribution (with very stiff criteria making approval difficult), but also of the BHC’s overall capital adequacy for purposes of other supervisory judgments. The analysis is on a very short turn-around and requires consideration not only of risk-management issues such as a BHC’s exposure in the current mortgage-foreclosure paperwork crisis, but also the strategic impact of the Dodd-Frank Act over the next two years (when many far-reaching provisions not yet proposed will take effect).

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