Mid-Tier Banks View Dodd-Frank Stress Test Process as More Important than Results

The 2015 Dodd-Frank Act Stress Test process is viewed as more important than the actual results, in that it guides banks to understand capital and credit risk management within their respective institutions.

Fitch Ratings examined the Dodd-Frank Act Stress Test process and results, finding that steps taken to gather the data for mid-tier regional banks ($10 billion-$50 billion in assets) are a positive development.

"There might be limitations to using the disclosed results for comparison purposes," the report said. "Nevertheless, we believe there is value in the stress-testing process in terms of improving both risk management and capital planning. Leading up to the last credit cycle, we believe it was clear that many banks lacked sufficient tools to monitor risks, particularly concentration risks, which led to significant credit losses and depleted capital levels."

The stress test process reviewed 60 mid-tier banks only applied the severely adverse scenario which included a 50 percent decline in real estate prices and a nearly 60 percent decline in equity markets over a period of multiple years, according to the report.

"There might be limitations to using the disclosed results for comparison purposes. Nevertheless, we believe there is value in the stress-testing process in terms of improving both risk management and capital planning."

Of the 20 Fitch-rated mid-tier banks, most passed the Dodd-Frank Act Stress Test by comfortable margins, reporting average minimum common equity Tier 1 (CET1) ratios in excess of the required capital minimums.

The average minimum CET1 ratio of the Fitch-rated banks over the nine-quarter evaluation period ending December 2016 is 9.9 percent, nearly double the minimum 5 percent threshold.

As a comparison, the self-reported bank holding company minimum CET1 ratio average for large regionals under stress testing in March 2015 was 9.1 percent. And under the Fed's analysis, that same minimum CET1 ratio average was 8.1 percent.

"These stress test results indicate that the banking industry's capital profile is more resilient post-crisis compared to the period leading up to it," Fitch said.