This post is part of a series titled “Supervising Our Nation’s Financial Institutions.” The show, written by Julie Stackhouse, executive vice president and officer-in-charge of oversight at the St. Louis Federal Reserve, is expected to appear at least once every month during 2017.
Among the results of the 2008 fiscal crisis recognized that the effects that failure of a large institution or the financial stress could have on the economy at large and financial markets. A goal of monetary reform that is post-crisis was risk-taking or oversight and regulation of these institutions whose size posed the greatest threat to stability read more .
These reforms were codified in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Underneath the Dodd-Frank Act, financial institutions with more or $50 billion in assets are subject to prudential standards that are improved. These criteria are designed to accomplish two objectives:
Improve an institution’s resiliency to increase its capability to carry out the functions of banks and reduce its probability of failure
Reduce the effects of a bank’s failure or material weakness oninhe financial system and the economy at large
To fulfill these goals, the Federal Reserve employs a range of tools to track institutions and reduce the risks they pose to the U.S. fiscal system.
Capital Stress Testing
The Fed assesses all bank holding companies with over $50 billion to ensure they have enough funds to weather fiscal and economic stress. This exercise, known as the Comprehensive Capital Evaluation and Review (CCAR), also allows the Fed to have a look at the effect of various financial situations across firms.
If the Fed decides that regulatory capital ratios can not be maintained by an institution under two sets of adverse situations, the institution may not make any capital distributions like stock repurchases and dividend payments without consent.
A complementary exercise to CCAR is Dodd-Frank Act pressure testing (DFAST). The DFAST exercise reviewed by the Fed and is conducted by the firm. In analyzing whether institutions have sufficient capital to absorb losses and support operations during economic 21, the Fed is aided by it. This forecasting exercise applies to banks and bank holding companies with over $10 billion in assets.