By Mary Ellen Biery
A possible move by federal regulators to allow more time for medium-sized financial institutions to begin new "stress testing" could bring more clarity and efficiency to the risk-management process, industry experts say.
Having a little longer to begin conducting the new capital-adequacy testing could also make the test results more informative - for banks, regulators and shareholders, according to Ancin Cooley, an advisory consultant to financial institutions and a former bank examiner with the Office of the Comptroller of the Currency.
"It's about giving institutions the time needed to do the legwork or the upfront work, to make sure the output is meaningful to the regulator and to the investor," said Cooley, principal of Synergy Bank Consulting Inc.
The Federal Reserve, the OCC and the Federal Deposit Insurance Corp. on Aug. 27 said in separate press releases they were considering a delay in implementing the requirements for annual capital-adequacy testing for banks with total assets of between $10 billion and $50 billion. Under the agencies' current timeline for implementing the new rules tied to the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act , the medium-sized banks would have to report results of their first stress tests as soon as January. If the agencies delay action, banks could have until September 2013 to begin reporting results. The biggest U.S. banks are already undergoing periodic stress tests.
"There's a lot at stake," said Tim McPeak, director of financial advisory services for Sageworks, a financial information company that provides risk management solutions to financial institutions.
There are around five dozen U.S. banks with assets of between $10 billion and $50 billion, including: Synovus Financial Corp. (NYSE: SNV), First Republic Bank (NYSE: FRC), New York Community Bancorp (NYSE: NYB), and Raymond James Financial Inc. (NSYE: RJF).
McPeak said banks have expressed concern that despite the high stakes and the expense involved, regulators haven't more clearly defined the parameters of the testing that will be required.
"Regulators have outlined at a high level what their expectations are going to be" in terms of banks testing their loan portfolios under various stressed conditions, McPeak said. But regulators have also indicated it's not enough to look at the loan portfolio alone, suggesting they also want to know how various scenarios would impact the institution's plans for raising additional capital, paying dividends and looking for outside investors, McPeak said. "They want all of those questions viewed in the context of the stress tests."
Having more time and a better understanding of what's expected should allow banks to be more efficient in developing their stress tests, too, McPeak said. "Even for a healthy bank, there will be some expense associated with this," he added.
By and large, a delay should be a good thing, even though there's the potential for it to mean that bad news about some banks is postponed, McPeak said. "It gives regulators a little more time to figure out what they're going to ask the banks to do. It also gives banks more time to figure out how they're going to proceed."
Cooley, too, said banks could have more time to learn about what could happen under various test results and about how they can manage those scenarios.
A delay may also provide smaller banks in the affected size group the time they'll need to develop cross-functional teams, he noted. Stress testing will require banks to develop a framework for examining stress across departments - with the credit department communicating with finance, and treasury communicating with risk management.
"Banks that have already developed enterprise-wide risk management processes are at an advantage because they can leverage those lessons from developing ERM," he said.
Indeed, the Federal Reserve acknowledged those worries in the press release announcing the possible delay.
"A number of commenters on the proposal raised concerns about the proposed timing of compliance with the company-run stress test requirements, specifically questioning if all institutions would have the resources, readiness, and ability to conduct stress tests," the Fed said. "The delay under consideration would help ensure that these companies have sufficient time to develop high-quality stress testing programs."
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.