Fed Calls On US Banks To Improve Capital Buffers
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The Federal Reserve warned on Monday that some of the country’s largest banks still fall short in areas critical to risk management and capital planning, raising speculation that banks could be pushed to increase their capital or curtail dividends and share buybacks to satisfy regulators.
The Federal Reserve warned on Monday that some of the country’s largest banks still fall short in areas critical to risk management and capital planning, raising speculation that banks could be pushed to increase their capital or curtail dividends and share buybacks to satisfy regulators.
Publishing its findings in the banks’ responses to the so-called stress tests, the Fed said big banks have made progress in preparing for stresses like those brought by the 2008 financial crisis but have more work to do to enhance their practices for assessing the capital they need to withstand stressful economic and financial conditions.
In a paper released on Monday, the Federal Reserve emphasised that bank holding companies, when considering their capital needs, should focus on the specific risks they could face under potentially stressful conditions.
In its evaluation, the Fed found that firms needed to improve a number of aspects of their capital planning processes, including their accounting for risks most relevant to the specific business activities, their methods of projecting the effect of certain stresses on their capital needs, and their governance of the capital planning processes.
Stress testing banks has become a key tool for regulators to monitor the health of the financial system after the 2007-2009 meltdown. Under the tests, banks must assume severe weakness in the economy and financial market turmoil and then calculate the expected losses under those conditions. The banks compare those projected losses with the capital levels held to determine if banks are adequately prepared for a severe economic downturn.
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Based on the results of the tests, the Feds will decide if banks can raise their dividend payouts to shareholders though some in the financial services industry have complained that the Fed’s rubric for the tests is not transparent enough.
The Fed study however suggests the largest and most complex banks will be expected to hold more than the bare minimum of capital as a buffer against potential losses. Regulators want banks to set capital targets above even banks’ own capital goals when gauging their ability to withstand losses, an unofficial requirement that could drive some banks to further raise capital levels.
“A key lesson from the recent financial crisis is that many financial companies simply failed to adequately identify the potential exposures and risks stemming from their firm-wide activities,” the Fed said in its paper, which did not identify the banks.
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