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FDIC releases bank stress test proposal

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The sign on a Bank of America ATM machine is pictured in downtown Los Angeles
The sign on a Bank of America ATM machine is pictured in downtown Los Angeles

By Dave Clarke

WASHINGTON (Reuters) - Bank regulators on Tuesday voted to release a proposal for how banks with more than $10 billion in assets should conduct stress tests annually to determine whether they can withstand a financial shock.

The tests are required by the 2010 Dodd-Frank financial oversight law, which has established stress tests as a key component of how regulators will gauge the health of the banking industry.

The largest U.S. banks are facing several regulatory tests of their operations.

The Federal Reserve, for instance, has to establish stress tests for bank holding companies with more than $50 billion in assets and the agency released a proposal for this requirement in December.

The Fed is also currently putting banks with more than $50 billion in assets through separate tests to gauge whether they have enough capital. The results of these tests are expected in March.

Regulators have said they will attempt to coordinate the different testing requirements as much as possible.

On Tuesday the board of the Federal Deposit Insurance Corp voted to 4 to 0 to approve the proposal for banks with more than $10 billion in assets. It will be out for 60 days for public comments.

"It's an important forward looking mechanism for institutions to identify risks and act accordingly," acting FDIC Chairman Martin Gruenberg said.

FDIC staff said it is not yet clear whether the first of these tests will be held in 2012 or 2013. The timing will depend on the comments received and when the Fed finalizes its December proposal for stress testing the largest banks.

The tests are intended to give banks and regulators a better idea of whether banks can weather a crisis and what steps they may have to take to strengthen their operations.

Under Tuesday's proposal, regulators each year would provide banks with stress scenarios in November. The banks would run the tests and report back to regulators in January.

Banks would be required to publish the results of the tests 90 days after submitting them to regulators in January.

A key difference between this testing regime and what the Fed is required to do for the largest banks is that the Fed itself will run the tests on banks larger than $50 billion.

The Fed and the Office of the Comptroller of the Currency will also have to issue a proposal for stress testing banks with more than $10 billion in assets for which they are the primary regulators. Tuesday's release only technically cover institutions overseen by the FDIC.

Officials said the Fed and OCC proposals will closely mirror what was approved by the FDIC board.

Right now, banks are most focused on the capital tests currently being conducted by the Fed because they will determine whether dividends can be increased this year, a key issue for investors.

Banks submitted information to the Fed in early December and the agency plans to inform institutions of the results in March.

Also on Tuesday the FDIC approved a final rule that requires insured depository institutions with more than $50 billion in assets to write "living wills" detailing how they can be liquidated if they fail.

The final rule made some technical changes to an interim final rule that was already in effect.

CORDRAY DEBUT

Tuesday marked new Consumer Financial Protection Bureau Director Richard Cordray's first FDIC board meeting.

Earlier this month in a controversial move President Barack Obama appointed Cordray to the job foregoing a Senate vote.

Dodd-Frank makes the CFPB director a member of the FDIC board. The FDIC insures individual deposits up to $250,000 and is the chief regulator of community banks.

Cordray promised at the meeting to work closely with other banking regulators in his job overseeing markets for credit cards, mortgages and other consumer financial products.

"Like the FDIC, the CFPB was created in reaction to a crisis in the American financial system to correct market failures that harmed an overwhelming number of American consumers and businesses," he said. "Among other things, we both share the common goal of supporting confidence in our financial institutions."

(Reporting By Dave Clarke; Editing by Andrea Ricci and Tim Dobbyn)

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