Since the near-collapse of the economy 2009, The Federal Reserve has been testing the capital adequacy of the nation's larger banks by making them show that they would have enough capital liquidity to survive adverse or disastrous economic conditions -- commonly known as "stress tests."
While big banks have been going through this process on an annual basis for several years now, many of the nation's mid-tier banks will now face the same tests. Last year, the Fed announced that banks between $10 and $50 billion in total assets will have to prepare for the stress tests, which will be conducted in the fall of 2013.
Even though banks in the $10-$50 billion range will not be subjected to as intensive a process as the nation's largest banks are, there are still similar expectations that banks of this size will deliver the data the Fed is seeking.
I spoke with several industry experts about how medium-sized banks will cope with being stress tested. One of those I spoke with, Jeff Sant, EVP of sales and marketing and co-founder of Primatics, a software provider for financial institutions, says one fear is that many of the banks in this asset range will not be suitably prepared for the stress tests. Though they won't be subjected to as robust reporting requirements as the larger banks, many may still be unprepared since they don't normally take into consideration how they might be affected by large, macro-ecomonic scenarios, he says.
However, it's not all doom and gloom for banks of this size, Sant notes. On the other hand, many smaller banks are far better capitalized than larger banks and not as systemically important to the national economy, meaning it could also be less likely they will fail the stress tests.
Either way, it will be interested to see how these banks fare in the stress tests, though the results will not be made public until likely next year. For a more in depth look at how the Fed stress tests have affected the banking industry, be sure to download our August digital issue.