The Federal Reserve may expand its annual review of bank capital beyond the 19 largest financial institutions to push rigorous risk-management standards into more banks, according to people familiar with the discussions.
Firms with assets of $50 billion or more would be required to conduct an exam, with boards showing Fed examiners how stock buybacks, dividends, earnings, and new regulations affect capital over several years, said the people, who declined to be identified because the proposal isn’t final. The Fed completed its first annual study of capital plans in March, clearing the way for firms such as Wells Fargo & Co. (WFC) and JPMorgan Chase & Co. (JPM) to boost dividends.
Bankers, including JPMorgan Chase Chief Executive Officer Jamie Dimon, have criticized stricter federal oversight of the biggest firms, saying new regulations may impair lending and economic growth. Some investors welcome the tougher supervision, which the Fed is imposing in compliance with the Dodd-Frank Act, passed last July.
“This amount of oversight is something that has been lacking in the corporate board room in most banks,” said Joel Conn, president of Lakeshore Capital LLC in Birmingham, Alabama. “For smaller banks, it is pretty clear that their capital ratios were not adequate for a major economic downturn.”
Still, concerns about how the Dodd-Frank Act will be implemented, along with slowing economic growth, are hurting bank-share performance. The KBW Bank Index, which tracks 24 U.S. financial institutions, is down 10 percent this year, compared with a 2.5 percent gain for the Standard & Poor’s 500 Index.
Focusing on Capital
The possible expansion of the reviews shows how the Fed and other regulators are focusing on capital as the most important buffer against risk. Financial stability isn’t the only reason. Regulators don’t want to ask Congress for another bailout like the $700 billion Troubled Asset Relief Program, said Dino Kos, managing director at Hamiltonian Associates Ltd., New York.
“Nobody in the regulatory apparatus ever wants to do that again,” said Kos, a former executive vice president at the New York Fed. The reviews should be extended to more banks because many need the discipline of looking at capital needs over longer time horizons, he said.
“For the past 20 years, bankers have said, ‘We understand derivatives, we understand risk management, we understand risk controls,’” Kos said. “What regulators learned was, no, they don’t.”
Under a criterion of $50 billion in assets or more, M&T Bank Corp. in Buffalo, New York with total assets of $67.8 billion in the first quarter, and Comerica Inc. in Dallas, Texas, with $55 billion, would be among the banks asked to conduct capital-plan reviews.
“Capital planning and stress testing is nothing new at M&T, it’s how we manage the bank, and we have a long and successful track record at it,” Rene Jones, M&T Bank’s chief financial officer, said in an e-mail. “We had the lowest loan losses of any of the top 20 commercial banks through the financial crisis.”
Wendy D. Walker, a spokeswoman for Comerica, said in an e-mail that it was “premature” to discuss the matter.
The Fed in 2009 ordered the top 19 U.S. banks to conduct stress tests against adverse economic scenarios. It later ordered 10 of them, including Charlotte, North Carolina-based Bank of America Corp. (BAC) and Atlanta-based SunTrust Banks Inc., to raise an extra $74.6 billion in capital. The results were released May 7 that year.
The more recent review, completed in March this year, also contained a stress test involving a recession, a rise in unemployment and falling stock and housing prices. The test went beyond capital adequacy and forced bank boards to sign off on an explanation of how they would manage capital through a multiyear cycle of recession and recovery. The Fed wanted an explanation of capital decision-making.
The Fed dedicated more than 100 staff to the March review, using a new multidisciplinary approach that enlisted economists, supervisors, and accounting experts in the analysis of financial institution risk.
Banks are dedicating more senior executives to the capital planning process and are getting into the habit of looking at capital through economic cycles, said one of the people familiar with the process. At the same time, Fed officials learned that the banks need to improve systems that pull loans, securities, and other risks together into formats that are easy to analyze and report to regulators, the person said.
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