Fed will ‘stress test’ more banks in 2014

The Federal Reserve will expand its "stress-testing" program to 30 banks next year, up from 18 in 2012, as part of regulators' long-running campaign to make banks boost capital and improve risk management to avoid another financial crisis.

The rules were unveiled by the central bank Friday. Under the new standards, all banks with more than $50 billion in assets will be examined to make sure they have enough capital to keep operating even if the economy goes through another severe downturn, Fed officials said on a conference call before the release,

The changes are part of a broader push by regulators worldwide to tighten bank regulation in the wake of the 2008 collapse of the mortgage market, which caused the collapse of Lehman Brothers and the forced rescues of institutions ranging from Merrill Lynch and Bear Stearns to American International Group. Banks are being required to hold on to a higher percentage of their assets as capital, which protects them from losses on loans and securities, as well as beef up procedures for identifying and managing risk, Fed officials said,

"The capital planning and stress testing program has been an integral component of the Federal Reserve's broader supervisory and regulatory efforts to make the financial system stronger and safer since the financial crisis," Fed Gov. Daniel Tarullo said in a statement.

The central bank can effectively prevent banks whose capital plans it finds lacking from buying back stock or increasing their dividends. Over the past two years, banks including Citigroup, JPMorgan Chase and Goldman Sachs have all been asked to build up more capital before returning money to shareholders or to provide better documentation that their capital planning processes are in good shape.

The Fed also said it will disclose more information about the stress test processes than it has before.

In the past, regulators made public calculations of what would happen to each bank in a "severely adverse" economic scenario where the une! mployment rate reached 11.25% and gross domestic product dropped by 4.75% in a year. In the next review, regulators will also disclose how each bank would hold up in a milder recession, where unemployment reached 9.25% but long-term interest rates still rise.

Top trading banks will also be forced to analyze and disclose how they would fare if their largest trading partners failed, the Fed said,

All 30 banks subject to the capital review have to submit their plans to build and protect capital by Jan. 6.