- Examining the Stress Test
- May 11, 2009
- Law Firm: Blank Rome LLP - Philadelphia Office
This afternoon, the Federal Reserve released its white paper explaining the “design and implementation” of the Supervisory Capital Assessment Program (SCAP), more popularly known as the stress tests applied to the nation’s largest banks. The Fed said most banks have capital “well in excess of the amounts required to be well capitalized.” That said, it found that the nation’s 19 largest banks, including the banks they acquired, have together lost approximately $400 billion in the six quarters leading up to the end of 2008.
The SCAP required the banks to submit data and projections to their financial regulators in early March. The bank supervising agencies assigned over 150 of their supervisors, examiners, analysts, and economists working in teams to “conduct a comprehensive and consistent assessment simultaneously across the 19 largest BHCs [bank holding companies] using a common set of macroeconomic scenarios, and a common forward-looking conceptual framework.”
The goal of the SCAP is to determine how much capital these systemically significant banks should hold in order to “absorb losses should the economic downturn be longer and deeper than now expected.” Firms that will be required to “augment” their capital to create a buffer, will have the options of tapping the Treasury’s Capital Assistance Program; applying “to Treasury to exchange their existing Capital Purchase Program Preferred stock to help meet their buffer requirement;” and/or raising private capital. The Fed stressed that SCAP results requiring a bank to build a buffer should not be viewed as “a measure of the current solvency or viability of the firm.”
The SCAP results will not be made public until May 4th.