Academic journal article ABA Banking Journal

Need More Stress? the Government's 19 Mega-Bank Stress Test Put This Longstanding Methodology on the Public Radar. Some Say It's a Must, Going Forward. Others Say Think Twice, before Examiners Give You Migraines

Academic journal article ABA Banking Journal

Need More Stress? the Government's 19 Mega-Bank Stress Test Put This Longstanding Methodology on the Public Radar. Some Say It's a Must, Going Forward. Others Say Think Twice, before Examiners Give You Migraines

Article excerpt

[ILLUSTRATION OMITTED]

Most bank CEOs these days would like to find a way to reduce the stress in their lives. But earlier this year, John Koelmel, president and CEO of First Niagara Financial Group, Inc., deliberately asked for more.

Actually, it wasn't personal stress that Koelmel sought, but a stress test for his $9.6 billion-assets publicly traded holding company and First Niagara Bank, its savings association main subsidiary. The company, which serves upstate New York markets, had accepted $184 million in capital under the TARP Capital Purchase Program last year. Management wanted to redeem the government investment. At the same time, management wanted to bolster the company's profile.

So Koelmel directed that the bank subject itself to a stress test "based on even more severe economic assumptions than those used by the Federal Reserve Board," in the federal "Supervisory Capital Assessment Program," or SCAP. The test, and the retirement of the federal investment, came on the heels of a successful capital sale.

"We think it differentiated us as a winner," says Koelmel, in an interview. "We had decided we would raise the bar higher, to give quantitative support to the qualitative message we'd been giving for quite a while."

Stress testing and similar analysis was not a new effort for First Niagara, according to Koelmel, but efforts up until then had been for internal consumption and not publicized. Also, the scope, as in the government SCAP stress tests, was broader, and based on macroeconomic factors, rather than the traditional interest-rate stressing and the portfolio-specific (and sometimes loan-specific) stress testing that examiners nowadays expect for activities like commercial real estate lending.

Analysts from private analytical firms and stock brokerages were running their own versions of stress tests, based on the concept of the federal effort, on banks beyond the top 19 covered by SCAP. Koelmel says he'd rather run his own such tests and give the public the sense of the results, than be captive to what outside analysts compute and state.

An institutional "kick me" sign?

First Niagara voluntarily adopted as strategy a step that some of the nation's largest banks complained about when the government unveiled SCAP earlier this year and imposed it. Is Koelmel correct, that there are benefits to conducting wide-scale stress tests when your institution isn't required to perform them?

First Niagara was not the only bank to run internal stress tests based on the government model, according to Peter Davis, director of credit risk services in Ernst & Young's financial services advisory practice. He knows of a number of other large institutions that did not fall into SCAP territory that took up the government blueprint after its release in April. He says their managements wanted to know how their institutions would stack up against the SCAP banks.

SCAP and its aftermath

When Treasury Secretary Timothy Geithner announced the federal stress test for the nation's 19 largest bank holding companies, his message was greeted by a mixture of reactions, and even since the completion of the mammoth exercise, assessments of the significance and purpose behind the stress tests vary.

Some saw the action quite positively, as a means of demonstrating decisive government action in the face of worrisome conditions. Some wondered, "What will these stress tests do that armies of federal and state examiners haven't been doing for years?" Some saw them as exercises in eyewash (or worse terms), putting on a show of much action but little actual meaning. Some harbored the theory that the stress tests, from announcement to the May 7 release of results, were something of a regulatory snooze button--pushing the matter of the large banks' health into the future, by assuring a worried public and worried markets that "Uncle Sam was on the case, just calm down and give him time. …

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