CIT CIT Group Inc

By Donna Borak and Ryan Tracy 

WASHINGTON--The Federal Reserve on Friday released instructions and hypothetical "stress test" scenarios for 34 U.S. banks as part of its annual health checkup later this year.

Thirteen U.S. banks, including Bank of America Corp., Citigroup Inc., and J.P. Morgan Chase & Co., will have to undergo the full breadth of the Fed's supervisory exercise, which banks must pass to be able to boost dividends or share buybacks. Those firms will also have to prove they have sufficient capital to lend while withstanding a global market shock and a counterparty default.

The 2017 test brings one newcomer to the yearly exercise: CIT Group Inc.

Earlier this week, the central bank said it would free 21 banks with less than $250 billion in assets from the subjective portion of the Fed's annual stress test.

The annual exercise examines two critical aspects of the largest firms: first, whether banks hold enough capital -- money raised from investors or earned through profit -- to withstand severe economic stress in the financial system, and second, whether banks have the appropriate internal processes to identify and measure risk when considering their own capital planning. The Fed can reject a bank's plan to pay out shareholders on either basis.

Banks must submit to the Fed their own predictions about how they would perform by April 5 and the central bank will make public its verdict on those submissions by June 30.

This year's "severely adverse" scenario imagines a "slightly more severe downturn" in the U.S. economy than last year's, according to the Fed. The U.S. unemployment rate peaks above 10%, while commercial real state prices decline. The scenario also includes a more severe hit to the European and U.K. economies than last year, the Fed said.

The changes to the test tend to affect banks differently, depending on the composition of their balance sheets. Thanks to significant changes made by the Fed, this year will be a far easier ride for banks that don't have to do the subjective portion, particularly U.S. banks owned by Banco Santander SA and Deutsche Bank AG. Those banks previously failed the Fed's tests multiple years running.

The Fed said it would still examine those 21 banks' risk-management processes, through a "horizontal review" that would start in the third quarter of this year. The key difference: How individual banks fare on that review will not be made public, and any failings won't be tied to banks' ability to pay dividends.

Write to Donna Borak at donna.borak@wsj.com and Ryan Tracy at ryan.tracy@wsj.com

(END) Dow Jones Newswires

February 03, 2017 09:15 ET (14:15 GMT)

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