NEW YORK (Reuters) - The U.S. Federal Reserve wants banks to get something out of their annual stress tests beyond just ticking the box of regulatory compliance, but few banks actually do, according to a survey to be released later this week.
Moody’s Analytics polled 32 chief risk officers and others who took part in the stress tests this year, or may be required to participate next year. All said they used the results for “regulatory compliance,” but when it came to business decisions the numbers were much lower.
“The banks pretty universally say they want to get more out of stress testing,” said David Little, a managing director at Moody’s Analytics. “They’re spending a ton of money and the return-on-investment isn’t there if they’re just using it for compliance.”
There are two parts to U.S. stress tests, one called “DFAST” that is required by the Dodd-Frank financial reform law, and another called “CCAR,” which approves or rejects plans to use capital for dividends, share repurchases or investments.
Of 18 banks surveyed that participate in CCAR, only eight said the results factor into financial planning, budgeting and strategy. None said the results affected pricing. Of another 14 banks that only participate in DFAST, fewer than half said it affected planning or budgeting, and only two said it affected pricing.
The stress tests measure how banks would fare under hypothetical scenarios of market and economic turmoil. They may become more important as the Fed emphasizes stress test results over a global set of capital rules known as Basel III.
The Fed wants stress tests to influence the way banks go about day-to-day business, said Little, who has hosted roundtables of bankers and regulators to discuss the stress test. But that is not yet happening because banks are ill-equipped to collect and analyze data across their businesses in the way the Fed requires.
As a result, regulatory stress tests take three or four months to conduct, compared with just a day to run an internal test on the way a currency fluctuation or interest rate move would affect profits, Little said.
“Banks know the models the Fed wants them to run are very good,” he said. “It’s a good approach; it’s just a very expensive approach.”
Banks are devoting more resources to technology and models to streamline the process, Little said. JPMorgan Chase & Co (JPM.N), for instance, says it has 500 employees devoted to stress tests and thousands of additional staff peripherally involved.
Some are also working to improve results after embarrassing failures or mistakes. The Fed rejected Citigroup Inc’s (C.N) capital plan this year, citing weaknesses in loss projections, and Bank of America Corp (BAC.N) uncovered a $4 billion error in its stress-test calculations. JPMorgan and Goldman Sachs Group Inc (GS.N) had to resubmit capital plans last year because the Fed took issue with their planning processes.
Editing by Chizu Nomiyama