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Fed Unveils Expanded Stress Test

Stocks in this article: BAC JPM

NEW YORK ( TheStreet) -- The Federal Reserve on Friday outlined the economic scenarios to be used in the 2014 stress tests of the nation's largest banks, while adding 12 more banks to the original group of 18 that have to submit annual capital plans to the regulator.

Investors have grown used to the regulator's annual stress tests and capital plan reviews of the largest 18 U.S. bank holding companies, especially for the "big six," which include JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C), Wells Fargo (WFC), Goldman Sachs (GS) and Morgan Stanley (MS).

Twelve other holding companies have been subject to the stress tests and capital plan reviews over the past four years, consisting mainly of regional players, including U.S. Bancorp (USB) of Minneapolis, SunTrust (STI) of Atlanta and BB&T (BBT) of Winston-Salem, N.C., which had its initial 2013 capital plan rejected by the Fed in March.

While many smaller U.S. banks have their own annual stress tests, the "Gang of 18" has undergone a two-step process over the past four years. First, the companies undergo the Dodd-Frank Act Stress Tests, in which their third-quarter financials are tested using a "severely adverse" economic scenario developed by the Fed. Results of these tests are released in early March. The banks are gauged for their ability to remain well-capitalized, with minimum Tier 1 common equity ratios of 5% through the end of 2015, under a "severely adverse" economic scenario.

The second part of the annual stress test process is the Comprehensive Capital Analysis and Review (CCAR). The big banks must submit their annual plans to deploy excess capital through dividends, share buybacks and acquisitions by early January. These plans are then included in another round of stress tests, before the regulator decides whether or not to approve the capital deployment plans. The Fed announces second set of results a week after the first set of results is announced.

The Fed on Friday announced that the group of financial companies undergoing 2014 stress tests and requiring approval from the regulator for capital deployment would be expanded to add 12 more companies, adding regional names including Comerica of Dallas and Huntington Bancshares, as well as credit card lender Discover Financial, and the following five U.S. subsidiaries of foreign banks: BMO Financial, a unit of Bank of Montreal (BMO); BBVA Compass Bancshares, held by Banco Bilbao Vizcaya Argentaria SA (BBVA); HSBC North America Holdings, a unit of HSBC (HBC); RBS Citizens Financial Group, a subsidiary of Royal Bank of Scotland (RBS); and Santander Holdings USA, which is held by Banco Santander SA (SAN).

RBS hopes to exit the group facing Federal Reserve stress tests before 2017. The company on Friday announced it would "accelerate the divestment" of RBS Citizens. "A partial initial public offering is now planned for 2014 and the Group intends to fully divest the business by the end of 2016," RBS said.

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