Fed tells big banks to improve capital planning

WASHINGTON Mon Aug 19, 2013 2:02pm EDT

An eagle tops the U.S. Federal Reserve building's facade in Washington, July 31, 2013. REUTERS/Jonathan Ernst

An eagle tops the U.S. Federal Reserve building's facade in Washington, July 31, 2013.

Credit: Reuters/Jonathan Ernst

WASHINGTON (Reuters) - Big banks must improve the way they determine how much capital they need to withstand any future crisis, the U.S. Federal Reserve said, citing observations from regulators' periodic tests of banks' health.

The Fed said in a paper released on Monday that banks participating in regular "stress tests" had flaws in their capital planning processes, such as being unable to show that they considered all of the relevant risks to their businesses.

"Large bank holding companies have considerably improved their capital planning processes in recent years, but have more work to do," the Fed said.

Stress testing banks has become a key tool for regulators to monitor the health of the financial system after the 2007-2009 meltdown. The tests aim to determine whether the biggest banks are maintaining adequate capital levels by examining how they would weather a hypothetical market shock.

The Fed also uses the tests to decide whether banks can buy back shares or pay dividends to shareholders. Some in the financial services industry have complained that the Fed's rubric for the tests is not transparent enough.

In the round of testing that wrapped up in March, the Fed reprimanded JPMorgan Chase and Goldman Sachs based on 'qualitative' concerns about their capital planning, even though regulators said the banks' ratios were acceptable.

The Fed approved capital plans at 14 other firms, including Citigroup and Bank of America, with no strings attached. But the regulator said on Monday that all the banks needed to improve their planning in some way.

The Fed said its paper, which did not identify banks, describes regulators' expectations and pointed out practices that were weak or unacceptable in previous stress tests.

The paper pointed to problems such as modeling techniques that did not address bank-specific risks, loss and revenue projections that could not be replicated, or problems with governance of the planning process.

Regulators said the next set of Fed-administered stress tests will start this fall. The 18 firms that participated in 2013, plus 12 additional banks with more than $50 billion in assets, will be included, the Fed said.

(Reporting by Emily Stephenson; Editing by Karey Van Hall and Chris Reese)

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (15)
phillip2 wrote:
kinda like closing the barn door after all the horses are gone.

Aug 19, 2013 2:18pm EDT  --  Report as abuse
JoeObserver wrote:
Does this mean QE tapering postponed until banks improve their capital?

Aug 19, 2013 2:44pm EDT  --  Report as abuse
MikeyLikesIt wrote:
@JoeObserver

I’m sure that they have no idea. Something tells me that even if/when these banks fail the new stress tests being developed that the government will simply shrug their shoulders and ignore it.

Aug 19, 2013 3:10pm EDT  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

Recommended Newsletters

Reuters U.S. Top News
A quick-fix on the day's news published with Reuters videos and award-winning news photography and delivered at your choice of one of four times during the day.
Reuters Deals Today
The latest Reuters articles on M&A, IPOs, private equity, hedge funds and regulatory updates delivered to your inbox each day.
Reuters Technology Report
Your daily briefing on the latest tech developments from around the world from Reuters expert tech correspondents.