The U.S. Federal Reserve’s annual stress testing exercises have helped bolster banks’ capital positions and enhanced their risk management efforts, according to a report from Moody’s Investors Service published on Tuesday.
The Fed’s stress tests have pushed the largest U.S. banks to increase their capital cushions and to strengthen their internal risk management processes, the report says. Banks are holding more capital and paying out less in dividends, relative to pre-crisis levels, which is “a direct result of the heightened regulatory supervision,” the Moody’s report adds.
“Capital requirements have been increased and the necessity to pass the Fed’s stress tests creates a new de facto capital requirement,” says Rita Sahu, vice president at Moody’s, in a statement.
“The banks’ capital ratios are considerably higher today,” adds Sahu. “Most common dividend payouts are now within the Federal Reserve’s 30% guidance, whereas prior to the crisis payouts exceeding 50% were common.”
As the banks repeat the annual stress testing exercise, it has become more integrated in their risk management and capital planning processes, the Moody’s report says.
“Because qualitative and/or quantitative failures can deliver a reputational hit to a bank, [the Comprehensive Capital Analysis and Review (CCAR)] receives significant resource allocation and is an area of focus for banks’ management and boards,” says Sahu. “These tests provide an incentive for a bank’s management to improve processes and limit capital distributions, which can mean positive developments for creditors.”
The Fed will release results of this year’s stress test on June 23, the Moody’s report notes, and the results of the CCAR capital planning exercise will be published on June 29.