Fed finds banks lacking
Five years after one of the most costly financial crises in U.S. history, the 18 largest banks still fall short in at least one of five areas critical to risk management and capital planning, the Federal Reserve said.
While many banking companies have improved capital planning techniques and raised capital levels, “there is still considerable room for advancement across a number of dimensions,” central bank supervisors said in a 41-page paper released on Monday in Washington outlining weaknesses and successes in recent stress tests. The Fed didn't cite any banks by name.
The Fed staff study shows that, according to four such tests, some of the largest banks still lack comprehensive systems and policies to model, test, report and plan for economic calamities. While highlighting strengths and weaknesses, the central bank said all of the bank holding companies “faced challenges across one or more” of five areas, and called for better analysis tailored to each bank's business and risk.
Regulators are saying, “ ‘Look, we're going to continue to set the bar really high, and we're going to set the tone at the top for all the banks,' ” said Marty Mosby, an analyst at Guggenheim Securities.
The Fed conducted its first stress test of the largest banks in 2009 to promote transparency of bank assets and reveal how much money they could lose in an adverse economy. Confidence in banks was low because portfolios were opaque, capital was scarce and job losses were rising as the economy succumbed to the worst recession since the Great Depression.
Fed Chairman Ben Bernanke called the stress tests of 2009 “one of the critical turning points in the financial crisis.” Speaking in April in Stone Mountain, Ga., Bernanke said the tests “provided anxious investors with something they craved: credible information about prospective losses at banks.”
The KBW Bank Index, which tracks shares of 24 large U.S. financial institutions, has risen 25 percent this year compared with a 16 percent gain for the Standard & Poor's 500 Index.
Areas where some banking companies “continue to fall short of leading practice” include not being able to show how risks were accounted for and using stress scenarios and modeling techniques that didn't account for a bank's particular risks.
Fed regulators and bank boards neglected to enforce capital conservation at the start of the financial crisis. The 19 largest banks in 2007 paid out more than $43 billion in dividends as housing prices continued to fall, and $39 billion more in 2008 as the crisis began to accelerate. While shareholders gained, taxpayers had to shore up the banking system.
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