The Federal Reserve wants big banks to incorporate new Basel III rules into their annual stress tests starting this year.

Federal Reserve Bank

As reported earlier, top U.S. banks are required to hold twice as much equity capital as required under a new rule launched by U.S. regulators on July 9. The rules are intended to protect taxpayers from any future costly bailouts.

Rules will apply to large banks

The Fed’s new rule would apply to bank holding companies with $50 billion or more in total consolidated assets. The rule clarifies that in the next capital planning and stress testing cycle, these companies must incorporate the revised capital framework into their capital planning projections and into the stress tests required under the Dodd-Frank Wall Street Reform and Consumer Protection Act using the transition paths established in the Basel III final rule.

Next stress testing cycle overlaps with Basel III

The new rules, popularly called Basel III, finalized by U.S. regulators on July 9 would be rolled out in a phased manner starting from 2014, based on the size of the bank. For the biggest banks, having over $50 billion assets, phasing in of the new rules overlaps with the next stress-test cycle, which begins next month.

However, second tier banks with total assets in the range of $10 billion and $50 billion, have been given an extra year to incorporate the capital rules.

The second tier banks this fall are conducting their first company-run stress test under the Fed’s rules implementing the Dodd-Frank Act. The second tier banks will be required to calculate their stress test projections using the Fed’s current regulatory capital rules during the upcoming stress test to allow time to adjust their internal systems to the revised capital framework.

The annual stress tests have become central to the Fed’s efforts to fortify bank’s balance sheets, ever since the financial crisis broke out.

While smaller banks have been given time to adjust their internal systems, the Fed clarified the large banks would still be assessed using the same minimum 5 percent tier 1 common ratio as in earlier stress tests and capital plans. The Fed feels this would ensure consistency with their previous exercises.