Midsize banks that have been struggling to keep their footing in a rapidly changing regulatory environment are about to be hit with another punch, courtesy of Dodd-Frank. Since the financial crisis of 2008, banks have been forced to develop compliance programs for a host of new consumer regulations and are currently transitioning to a new capital framework. As reported yesterday by Mary Frances Monroe in American Banker, Dodd-Frank is about to add required annual stress tests to already overburdened midsized banks.
Defined as banks with between $10 and $50 billion in assets, midsized banks include 47 of the 100 largest banks in America. Midsize banks' operations differ significantly from many of the "large" banks, some of which have more than $1 trillion in assets. Nonetheless, beginning this Fall, midsize banks will have to perform complex and burdensome annual stress tests that are substantially similar to those required of financial institutions with more than $ 50 billion in assets.
Dodd-Frank will require midsize banks to project financial figures nine quarters in the future under "baseline," "adverse," and "severely adverse" economic conditions. The three hypothetical economic conditions are supposed to identify and incorporate a variety of potential increased risks, including risks associated with liquidity, capital, and interest rates, among others. Banks will be required to project losses, net revenue, net income, and the allocation for loan and lease losses for each condition.
Many midsize banks will have to rely on outside vendors to gather the data and perform the complex testing required under the rules. Once again, Dodd-Frank's one-size-fits-all strategy has failed to account for the nuanced and complex nature of the banking industry, and has placed increased stress on already overburdened midsize banks.
What is your bank doing to prepare to deal with these regulations? Who will bear the costs?
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