What You Can Learn From How Small Banks Handle Financial Stress

UPDATE: This article, originally published at 8:43 a.m. on Thursday, June 11, 2015, has been updated with bank stock performance and Federal Reserve reporting requirements.

NEW YORK (TheStreet) -- When big banks like JPMorgan Chase  (JPM) and Wells Fargo  (WFC) undergo yearly stress tests by the Federal Reserve, the agency determines whether they pass or fail. Smaller banks -- those with less than $50 billion in total assets -- get to test themselves.

Starting Monday, however, they'll have to disclose the results. The new requirement, which will affect at least four dozen banks with $10 billion to $50 billion in assets, is one of the rules set by federal regulators implementing the Dodd-Frank finance reform law, which doesn't mandate a pass/fail rating for the smaller companies.

The banks, which together have assets totaling $1.08 trillion, must report the results between June 15 and June 30, according to a statement from the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency. The agencies won't comment publicly about the results or the disclosures, intended to help consumers and investors gauge the risk of a bank's operations.

The biggest of the banks affected is San Francisco-based First Republic (FRC), which held $48 billion in total assets at the end of last year, according to the Fed. The bank noted in its quarterly financial statements that it is already incurring costs to comply with heightened regulations and that those expenses will increase when its assets top $50 billion on an average annual basis, expected to happen at the end of the third quarter.

The bank has been ramping up its liquid assets in preparation, since $50 billion is the threshold for the government's designation of systemically important financial institutions, which face tighter regulatory requirements. First Republic added $600 million in high-quality liquid assets in the first quarter for a total of $3.7 billion, Chief Financial Officer said on the company's first-quarter earnings call in April.

Even if Congress approves proposals to raise the threshold to $500 billion, First Republic would continue to focus on liquidity, CEO James Herbert said. 

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