Federal Reserve regulators are set to streamline the US banking stress test regime, giving particular relief to smaller lenders but leading to slightly higher capital requirements for some of the largest and most complex groups.

Under the changes laid down by Randal Quarles, the Fed governor who supervises the industry, large banks would be required to meet 14 capital-related requirements, down from 24 at present. The reforms aim to integrate the stress testing regime with the capital rules that banks have to observe, making the system more simple. 

Regulators are also scrapping “heightened scrutiny” of banks that plan to pay out more than 30 per cent of their profits as dividends.

“Our regulatory measures are most effective when they are as simple and transparent as possible, and this proposal significantly simplifies our capital regime while maintaining its strength,” Mr Quarles said. “It is a good example of how our work can be done more efficiently and effectively, and in a way that bolsters the resiliency of the financial system.”

Stress tests, which are conducted annually, are one of several key indicators that determine how much capital regulators demand that banks hold, but lenders have frequently complained about the regime’s unpredictability and complexity. Mr Quarles was appointed by President Donald Trump to ease the burden of post-crisis regulation on Wall Street and his proposals come as lawmakers consider an overhaul of aspects of the regime on Capitol Hill. 

Under the new regime regulators will use the results of the annual stress tests to establish a new “stress capital buffer”. This will sit alongside the existing capital requirements, meaning banks no longer have to keep track of two separate regimes. 

The impact of the changes will vary depending on each banks’ individual circumstances. 

For banks that are not considered “systemically important”, the Fed said the plans would “generally decrease modestly” their capital requirements - by between $10bn and $45bn in aggregate, based on previous stress tests. 

For their bigger rivals, in contrast, the proposals would “generally maintain or somewhat increase” capital requirements - by between $10bn and $50bn in aggregate, again based on past results. The sums involved are unlikely to be big enough, however, to require any bank to raise capital.

Regulators also set out other changes that could make the process more bank-friendly, including relaxing some of the assumptions that underpin the stress tests.

The Fed will no longer assume banks continue to expand their balance sheets during a meltdown in financial markets and the economy. Banks have long argued this assumption is unrealistic and makes the tests unnecessarily harsh.

Regulators are also scrapping “heightened scrutiny” of banks that plan to pay out more than 30 per cent of their profits as dividends. 

Financial markets were untroubled by the proposals. Shares in US banks large and small were little changed in New York after the Fed’s announcement.

"Bank investors have long groused about that threshold, so they should be pleased to see it eliminated," said Ian Katz, policy analyst at Capital Alpha.

Despite the potentially higher capital requirements for the biggest banks, he added, the Fed's proposal "simplifies the rules and the stress tests, and shouldn't stop most banks from returning more capital to shareholders".

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