November 9, 2012 / 10:36 PM / 5 years ago

Fed stress tests to let banks adjust capital plans once

(Reuters) - The Federal Reserve released instructions on Friday for the next tests to determine how big banks would weather a market shock, with a tweak to the rules that allows banks to adjust proposed dividend payments or stock repurchases if their first plans are rejected.

Stress tests are considered a crucial part of the Fed’s oversight of the biggest banks in the aftermath of the 2007-2009 financial crisis. The tests try to determine how banks would withstand another financial crisis.

“The Federal Reserve has been focused - and will remain focused - on ensuring the nation’s largest financial institutions have enough capital to weather severe, unexpected conditions and still continue lending to households and businesses,” Fed Board Governor Daniel Tarullo said in a statement.

Unlike previous tests, the Fed said it would give banks one shot to adjust plans to repurchase stock or boost dividends after the regulator’s initial assessment of the capital plan.

Citigroup ran into trouble after last year’s stress tests when the Federal Reserve turned down its plan to return capital to shareholders. The firm had been expected to be able to raise its quarterly dividend.

The Fed said it would release on November 15 the scenarios that will be used in the next round of stress tests.

Last year’s shock scenarios involved a hypothetical deterioration of the European debt crisis, spiking unemployment and U.S. gross domestic product falling by as much as 8 percent.

The firms tested this year will include banks that were part of the initial stress testing program, plus other firms with more than $50 billion in assets. Smaller banks will have more time before they must participate.

Reporting By Emily Stephenson in Washington. Editing by Andre Grenon

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