Dodd-Frank, the Volcker Rule, and other bank regulations have been ongoing and increasing in the years after the great recession. Now we have a new communication from the Federal Reserve calling for the top eighteen large U.S. bank holding companies being required to submit the results of their own company-run, mid-year stress tests back to the Federal Reserve on July 5.
The Dodd-Frank Wall Street Reform and Consumer Protection Act requires that these largest bank holding companies and non-bank financial institutions conduct two stress tests per year and this is the first communication of such.
Each banking firm is charged with developing its own baseline, adverse, and severely adverse scenarios. This is supposed to best reflect the strength and weakness and the individual operations and risks for each bank.
Tests conducted earlier this year used Fed-generated scenarios and the Federal Reserve also conducted its own supervisory stress tests of the institutions. Each firm will be required to release the results produced under its severely adverse scenario between September 15 and September 30.
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The full mid-cycle stress test instruction summary is here. Today's news should probably be considered more routine updates than anything breaking.
We would take the cynical side of this with a simple question. If a creditor asked you to construct a financial scenario on yourself based upon your creditworthiness and your ability to operate under adverse conditions that you deem the most adverse, would you skew your valuations and assumptions higher or lower?
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