The FRB has finalized proposed systemic-stress test standards applicable to bank holding companies (BHCs) and state member banks with assets over $50 billion and nonbank financial companies designated as systemic by the Financial Stability Oversight Council, collectively “covered companies.” These rules come in concert with inter-agency ones requiring company-run stress tests from banks and BHCs with assets between $10 and $50 billion. The final standards will immediately affect stress tests from the largest BHCs, stipulating the scenarios, disclosures and FRB evaluation criteria governing tests already under way at many of these BHCs. Results will determine the degree to which covered BHCs may make capital distributions (e.g., dividends) and drive strategic planning in advance of final U.S. rules to implement the Basel III standards. The final stress-test rule addresses some industry concerns, for example eliminating at least for now plans for disclosures relating to baseline-scenario results that many feared would amount to government-sponsored earnings guidance. The corporate-governance standards have also been revised to make it more clear that directors need not play a hands-on role in setting stress-test procedures. Nevertheless, the Board did not, as many banks requested, make its review protocols wholly transparent nor did it eliminate idiosyncratic factors that the Board believes make the stress tests better even though BHCs argued that they undermine comparability and, perhaps, subject individual firms to undue sanction. The final rule also does not clearly differentiate the manner in which designated non-bank firms would be judged, although the FRB indicates that it understands the need to consider the differences between organizations largely focused on banking and any new entities deemed systemic and, thus, subjected to these tests.
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