3 Stocks That Could Benefit As Fed Considers Easier Stress Tests For Regional Banks

Daniel Tarullo, a board member at the Federal Reserve, explained the proposals under discussion in a speech titled "Next steps in evolution of stress testing," delivered to the Yale University of Management Leaders Forum, New Haven, Connecticut.

Takeaways

• The Fed is considering applying a stress capital buffer or SCB to protect the financial system from any potential shock at big financial giants.
• Banks with less than $250 billion in assets that do not have significant international and non-banking activity will be exempt from the qualitative review of the CCAR. The rationale behind the move: Less complex firms need not invest as much as more complex firms for stress testing.
• Although these less complex firms can enjoy the privilege of reduced intensity of supervision of capital planning processes, removal of any supervisory uncertainty and elimination of public objection to their capital plans on qualitative grounds, they still have to comply with the quantitative side of the stress test.

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The stress testing came into effect following the mandate by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The Act requires that banks provide data to the Fed on loans, securities holdings, counter party exposures, trading positions, revenues, expenses and balance sheets. The Fed plugs the data into its supervisory models under hypothetical adverse and severely adverse scenario. The findings are then made public.

Aside of the Act, the Fed's supervisory role also arms it with the power to assesses the capital adequacy of firms under the Comprehensive Capital Analysis and Review, or CCAR. The central bank can object to a firm's capital plan on either quantitative or qualitative grounds.

The regulations to implement the ideas are not scheduled until early next year and therefore is unlikely to be applied to the 2017 cycle.

Likely Stocks To Benefit

Some of the bank stocks that could benefit if the proposals are implemented include:

• Citizens Financial Group Inc CFG.
• Comerica Incorporated CMA.
• Zions Bancorp ZION.

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