U.S. banking regulators say the large banks need to do more to ensure they are holding enough capital to weather economic and financial market distress.
The U.S. Federal Reserve Board published a new paper Monday indicating that, while large banks “have considerably improved their capital planning processes in recent years”, it says they “have more work to do to enhance their practices for assessing the capital they need to withstand stressful economic and financial conditions.”
In the paper, the Fed discusses its expectations for capital planning at large banks, and describes the range of practices it has observed at these companies during the past three stress testing exercises. It says it 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.”
The Fed says that its paper “is intended to promote better capital planning at bank holding companies generally, and to provide greater clarity on the standards against which those practices are evaluated as part of the CCAR exercise.” In particular, it emphasizes that, when considering their capital needs, large banks “should focus on the specific risks they could face under potentially stressful conditions.”