* Fed estimates 35 banks will be subject to the tests
* The capital tests will be conducted annually
(Adds analyst quotes and link to factbox)
By Dave Clarke and Joe Rauch
WASHINGTON/CHARLOTTE, N.C., June 10 The Federal
Reserve will subject more banks to annual stress tests to
determine whether they have enough capital and can raise their
On Friday, the Fed said it is proposing that banks with $50
billion or more in assets be subjected to the capital testing
regime, bringing the number of banks that would face annual
tests, if they were conducted today, to 35 from a prior level
Among the banks that would now fall under the testing
regime, based on Fed data through March 31, are Northern Trust
Corp (NTRS.O), M&T Bank Corp (MTB.N), Discover Financial
Services (DFS.N) and Comerica Inc (CMA.N). [ID: nN10212004]
The tests seek to determine how a large bank whose failure
could hurt the economy and markets would weather a financial
shock or an economic downturn.
"Institutions would be expected to have credible plans to
have sufficient capital so that they can continue to lend to
households and businesses, even under adverse conditions," the
Fed said in a release.
Bank stocks .BKX, already under pressure, finished the
day down 0.4 percent on Friday after being down by about 2
percent earlier in the day, as measured by the KBW Bank Index
of large-cap financials. Some of the biggest decliners were
regional bank stocks that are now going to face annual tests.
The test has real consequences for banks and their
Following the end of the latest review in March, banks such
as JPMorgan Chase & Co (JPM.N) and Wells Fargo & Co (WFC.N)
were able to announce plans to boost their dividends, while
Bank of America Corp (BAC.N) was not.
"It's an incremental negative that makes it easier to be
negative and sell any financial stocks right now," Michael
James, a senior trader at regional investment bank Wedbush
Morgan in Los Angeles, said in reference to the Fed proposal.
"The financial stocks have been a big weight and an
underperformer all year, so the path of least resistance in the
financials continues to be lower, and this won't help that."
Frederick Cannon, bank analyst at Keefe, Bruyette & Woods,
wrote in a note to clients that the Fed proposal should not
have a big impact on the banks that will now be subject to the
He said these banks have been expecting their capital to
come under greater scrutiny from regulators and the impact of
the tests "should be limited and may only cause small delays of
capital deployment if planned for the near term."
The biggest challenge facing the new banks on the capital
test list is they have different business models than the
largest institutions and will have fewer ways to raise capital
if the Fed says they need to do so, some analysts said.
"These banks don't have investment banking or capital
markets for growth to fall back on," said Matt McCormick,
portfolio manager at Bahl & Gaynor Investment Counsel Inc. "A
lot of these guys have big real estate and commercial real
estate exposures. This is going to make loan growth very
difficult, not be a catalyst for it."
Determining exactly how the Fed capital tests will impact
individual banks can be hard to gauge because the agency does
not release specifics about how the tests are conducted or the
results, said Christopher Whalen, senior vice president and
managing director at research firm Institutional Risk
"They have been completely opaque and there is no way of
benchmarking or verifying what anyone is doing," he said.
During the 2007-2009 financial crisis, the government was
forced to extend substantial support to banks such as Citigroup
Inc (C.N), and the tests are one of several measures taken by
regulators to help prevent the United States from having to
make future bailouts.
The new Dodd-Frank law requires a set of stress tests for
banks, some performed by banks and others directly by
regulators, to ensure they can survive a steep downturn in
The Fed said the expanded capital tests are intended to
complement the stress tests required by Dodd-Frank.
The amount of information banks would have to provide the
Fed for the capital tests would depend on the size and
complexity of the institution, the Fed said.
The rule is expected to be finalized later this year and
the new round of reviews is planned for early 2012.
The proposal will be out for comment through Aug. 5.
(Reporting by Dave Clarke in Washington and Joe Rauch in
Charlotte, North Carolina; additional reporting by Dan Wilchins
in New York; editing by Gerald E. McCormick, Andre Grenon, Gary