The Federal Deposit Insurance Corporation (FDIC) recently issued proposed regulations that require nearly two dozen banks to conduct stress tests that measure capital levels under varying economic and financial scenarios. These new regulations cover nearly two dozen mid-size and lesser known banks regulated by the FDIC.



SEE: Who Backs Up The FDIC



Stress Tests
The FDIC is charged under Section 165 of the Dodd-Frank Act to ensure that state nonmember banks and state chartered savings associations run annual stress tests. These tests would assess the impact of different financial and economic scenarios on an institutions earnings and capital strength. These proposed regulations cover 23 institutions with greater than $10 billion in consolidated assets.

The banks will conduct the stress tests under three different scenarios, including a baseline, adverse and severely adverse. The tests will estimate the pro forma impact of these scenarios on capital and earnings every quarter utilizing a nine quarter forward time horizon.

The results will contain estimated losses by exposure category, pre-provision net revenue, changes in loan loss reserves, total assets, aggregate loan balances and anticipated capital distributions over the time horizon. The 23 institutions would also be required to publish a summary of the results of the stress tests for investors and shareholders to examine.

Some of the publicly traded institutions covered by these proposed regulations include New York Community Bancorp (NYSE:NYB), BancorpSouth (NYSE:BXS), Umpqua Holdings (Nasdaq:UMPQ), First Republic Bank (NYSE:FRC) and Synovus Financial (NYSE:SNV), according to the Wall Street Journal. (For related reading, see Banking Stress Tests: Would Yours Pass?)

Buyer Beware
Although these tests seem fairly comprehensive, the FDIC stressed that the tests only measure the capital adequacy of an institution under a range of scenarios over a fixed time horizon, and should be viewed as only one measure of the financial strength of a bank. The stress tests do not measure a bank's liquidity, the impact of interest rates changes or the capital planning process.

Another problem with the tests is the lag time before investors can examine the results of the stress tests. The banks will conduct the tests based on data for the period ending September 30 of each year and must report the data to the FDIC the following January. The banks then must release the results to the public within 90 days. This timing process might mean that investors may receive data that is seven months old.

The usefulness of the tests might also vary by institution as the proposed regulations only state that a bank has to release a "summary" of the results, leaving the amount of disclosure at the discretion of each bank.

The Bottom Line
The government is not finished with implementing the increased regulation required under the Dodd-Frank Act, and has proposed stress tests for mid-size banks under its jurisdiction. Although these tests are not a 100% reliable predictor of future problems, any step towards more disclosure is welcome and should make investors happy. (For more, read The History Of The FDIC.)

Related Articles
  1. Term

    How Time Deposits Work

    A time deposit is an interest-bearing bank deposit that has a specific maturity date.
  2. Term

    Who Benefits from Microfinance?

    Microfinance describes banking services provided to low-income people or groups. Specific services offered by microfinance institutions include microloans, micro-savings and micro-insurance products.
  3. Stock Analysis

    3 Popular Financials Stocks in 2015 (WFC, COF)

    Find out about some of the popular financials stocks in 2015, why they have become popular and whether they will remain popular going forward.
  4. Retirement

    Is Bank of America Stock Suitable for Your IRA or Roth IRA? (BAC)

    Learn why Bank of America's established track record and long-term stability make it more suitable for a traditional IRA than for a Roth IRA.
  5. Stock Analysis

    Bank of America's 3 Key Financial Ratios (BAC)

    Discover some of the key financial ratios that show the quality of Bank of America's loan portfolio and how profitable the bank has been.
  6. Stock Analysis

    Wells Fargo's 3 Key Financial Ratios (WFC)

    Look at some of most important financial ratios for with Wells Fargo & Co. and understand why they are so important for analyzing the bank's core business.
  7. Economics

    What's a Non-Banking Financial Company?

    A non-banking financial company, or NBFC, does not hold a banking license, yet it still provides many banking services.
  8. Stock Analysis

    3 Disrupters of Retail Banking

    Understand how the retail banking industry operates and why it's becoming outdated. Learn about three disrupters that are changing the way consumers bank.
  9. Investing Basics

    APR and APY: Why Your Bank Hopes You Can't Tell The Difference

    Banks use these rates to entice borrowers and investors. Find out what you're really getting.
  10. Investing Basics

    Defining The 3 Types Of Investments

    The first step to being a successful investor is knowing what is and isn't an investment.
RELATED FAQS
  1. Are 401ks FDIC insured?

    The Federal Deposit Insurance Corporation (FDIC) works as a protector for customers when banks and financial institutions ... Read Full Answer >>
  2. Does the FDIC cover identity theft?

    When a third party gains access to your bank account and conducts transactions without your consent, the FDIC does not have ... Read Full Answer >>
  3. Does the FDIC cover credit unions?

    The Federal Deposit Insurance Corporation (FDIC) does not cover credit unions. The FDIC only insures deposits in banks and ... Read Full Answer >>
  4. Does the FDIC cover business accounts?

    Bank deposits owned by corporations, partnerships, limited liability companies (LLCs), and unincorporated associations, including ... Read Full Answer >>
  5. How long does a stock account have to be dormant before it can be escheated?

    A stock account is typically considered dormant and eligible for escheatment after five years of inactivity; however, this ... Read Full Answer >>
  6. Are variable annuities FDIC insured?

    Variable annuities are not insured by the Federal Deposit Insurance Corporation (FDIC), which regulates only bank products. ... Read Full Answer >>
Hot Definitions
  1. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  2. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  3. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
  4. Dark Pool Liquidity

    The trading volume created by institutional orders that are unavailable to the public. The bulk of dark pool liquidity is ...
  5. Godfather Offer

    An irrefutable takeover offer made to a target company by an acquiring company. Typically, the acquisition price's premium ...
Trading Center