Federal Reserve Governor Daniel Tarullo said most of the 19 largest U.S. banks need to improve their capital planning.
Tarullo, the Fed governor in charge of supervision and regulation, said stress test results released last month showed the U.S. banking system was stronger than it was during the financial crisis. Banks have also improved the way they estimate how much capital they should retain or pay out.
“However, there appears to be room for improvement at virtually every firm, and at some firms the amount of work needed is still significant,” Tarullo said in the text of his remarks to the Chicago Fed’s annual conference on risk. “This will remain a major focus of supervisory efforts.”
The Fed said last month that 15 of the 19 largest U.S. banks could maintain adequate capital levels even in a severe recession scenario that assumes they continue to pay dividends and buy back stock. The results of the so-called stress tests showed that nearly three years of economic expansion have helped U.S. banks raise profits, rebuild capital, and increase liquidity after the collapse of Lehman Brothers Holdings Inc. in 2008 nearly toppled the financial system.
Tarullo said the aggregate tier one common ratio, a measure of bank capital, of the 19 largest banks at the end of the third quarter of 2011 was about 10.1 percent, “nearly double the 5.3 percent aggregate ratio for the firms at the end of 2008.”
The Fed started the most recent test and review of banks’ forward-looking capital strategy in November, saying they should have “credible plans” to meet tougher standards required by new regulations and to continue lending even in period of financial stress.
Plunge in Stocks
The Fed asked banks to test their capital against scenario of an unemployment rate of 13 percent, a 50 percent drop in stock prices and a 21 percent decline in house prices under the stress scenario.
Six banking-holding companies with large trading, private equity and derivatives activities were also subjected to tests of these positions from a “global market shock.” The six were Citigroup, Bank of America Corp. (BAC:US), Wells Fargo & Co., Morgan Stanley (MS:US), Goldman Sachs Group Inc. (GS:US) and JPMorgan Chase & Co. (JPM:US)
The stress tests are now a standard feature of the Fed’s big-bank supervision and oversight of financial risk. The concept was born in late 2008 when Chairman Ben S. Bernanke was trying to discern the maximum losses facing the banking system following the collapse of Lehman Brothers.
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