Fed to give fail­ing stress test banks sec­ond chance

The Pak Banker - - Front Page -

WASH­ING­TON

The Fed­eral Re­serve will give the 19 largest banks a pre­lim­i­nary re­sult of its cap­i­tal stress test, of­fer­ing in­sti­tu­tions that fail a chance to ad­just their div­i­dend and stock buy­back poli­cies.

The change comes af­ter Cit­i­group Inc. and SunTrust Banks Inc. (STI) nar­rowly missed meet­ing the 5 per­cent tier one com­mon eq­uity to risk- weighted as­sets min­i­mum cap­i­tal ra­tio in the 2012 test at 4.9 per­cent and 4.8 per­cent re­spec­tively. Ally Fi­nan­cial Inc. (ALLY) had a stressed ra­tio of 2.5 per­cent in the last test.

While the change gives bank boards a sec­ond chance, the Fed will also pub­lish the re­sult of their ini­tial cap­i­tal pro­posal, show­ing how far the firms missed in their first at­tempt. A se­vere short­fall on the first at­tempt will gen­er­ate greater scru­tiny of a bank’s cap­i­tal plan­ning process by reg­u­la­tors, ac­cord­ing to a bank su­per­vi­sor who de­clined to be iden­ti­fied be­cause the tests are not com­pleted. Even banks that pass the min­i­mum stress ra­tio could fail if the Fed de­tects their cap­i­tal plan­ning process is flawed, the Fed’s in­struc­tions said.

“The abil­ity to ap­peal ob­vi­ously not only re­flects Citi and SunTrust, but a lot of re­quests from the in­dus­try for a sec­ond hear­ing,” said Karen Shaw Petrou, manag­ing part­ner at Fed­eral Fi­nan­cial An­a­lyt­ics, a Wash­ing­ton con­sult­ing firm spe­cial­iz­ing in bank reg­u­la­tion.

The Fed’s dis­clo­sure of a bank’s pre­lim­i­nary re­quest “in­jects a lot of rigor into the process,” she said. “There is tremen­dous pres­sure on the banks now on get­ting it right the first time.”

The Fed es­tab­lished the an­nual stress tests in 2009 to re­store con­fi­dence in the fi­nan­cial sys­tem af­ter the worst fi­nan­cial cri­sis since the Great De­pres­sion brought down Bear Stearns Cos. and Lehman Broth­ers Hold­ings Inc. Reg­u­la­tors have since com­ple­mented the test with a cap­i­tal plan­ning re­quire­ment to im­prove boards’ man­age­ment of risk and div­i­dend and stock buy­back de­ci­sions.

“The Fed­eral Re­serve has been fo­cused — and will re­main fo­cused — on en­sur­ing the na­tion’s largest fi­nan- cial in­sti­tu­tions have enough cap­i­tal to weather se­vere, un­ex­pected con­di­tions and still continue lend­ing to house­holds and busi­nesses,” Fed gover­nor Daniel Tarullo said to­day in a state­ment re­leased by the cen­tral bank.

The Fed’s re­jec­tion of Cit­i­group’s plan was a blow for then- Chief Ex­ec­u­tive Of­fi­cer Vikram Pan­dit, who had primed share­hold­ers for more re­wards. Pan­dit, who cut the bank’s div­i­dend dur­ing the fi­nan­cial cri­sis, filed a new plan in June with­out a re­quest for an in­creased div­i­dend or share buy­backs, end­ing his push for a 2012 pay­out. The episode was among a se­ries of set­backs that led the bank’s di­rec­tors to oust Pan­dit in Oc­to­ber, a per­son fa­mil­iar with the mat­ter said at the time.

Shan­non Bell, a spokes­woman for the New York­based lender, de­clined to com­ment on the Fed’s ac­tion to­day.

The 19 largest banks have boosted their tier one com­mon eq­uity to $803 bil­lion in the sec­ond quar­ter of 2012 from $420 bil­lion in the first quar­ter of 2009, the Fed said in a press re­lease.

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