April 10, 2012

Large U.S. banks did well under a Federal Reserve stress test completed earlier this year, but some banks still have a significant amount of work to do to improve the amount and quality of their capital, Fed Governor Daniel Tarullo said on Tuesday.

"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 remarks prepared for a conference in Chicago.

"This will remain a major focus of supervisory efforts, in next year's capital review, and more generally."

The Fed uses the annual stress tests to give the markets and regulators a window into the health of the U.S. banking industry. They are also used to determine if individual banks are strong enough to reduce their capital buffers through such moves as boosting stock dividends.

The tests apply to banks with more than $50 billion in assets and in March the Fed released the results for the 19 largest banks.

Tarullo's comments suggest the Fed has no plans to pull back on its push to get financial giants to meet tougher capital standards, even though the recent stress tests results were viewed by analysts and other observers as a sign of how far the industry has recovered sin c e the 2007-2009 financial crisis.

Tarullo did not comment on which banks need to improve their balance sheets, but MetLife Inc, the largest life insurer in the United States, and Citigroup Inc, the nation's third-largest bank, were among just four of 19 banks that were not deemed strong enough to give capital back to shareholders.

Ally Financial and SunTrust Banks Inc also failed to meet that standard, which applied hypothetical worst-case economic scenarios through the end of 2013.

The push by the Fed and foreign regulators to force big banks to boost their capital - or how much they are funded by equity as opposed to debt - has been a source of tension with the industry.

Many bankers argue that the standards being applied go too far and will inhibit their ability to lend. Some executives have pointed to the U.S. stress test results as evidence that many Wall Street giants are already well capitalized.

"We deeply believe in stress testing, and we even think that a severe stress test like this, properly calibrated, is appropriate," JPMorgan Chase CEO Jamie Dimon said last week in a letter to investors. "But we also know - as the real stress test after Lehman's (2008) collapse and the recent severe Fed stress test make eminently clear - we have plenty of capital."

Advocates of strong capitalization, such as former Federal Deposit Insurance Corp Chairman Sheila Bair, are pushing the Fed to dismiss the industry's complaints as self-serving and are encouraging the central bank to use new rules required by the 2010 Dodd-Frank financial oversight law to further boost capital standards.

TEST CHANGES

Tarullo said the Fed plans to make some changes to how it administers the annual stress tests starting with the 2013 edition.

For instance, the Fed's decision on whether a bank can increase its stock dividends will now go into effect in the second quarter instead of the first quarter, Tarullo said.

The Fed will also provide more time for running the tests, but Tarullo did not give a precise time frame. Last year the Fed announced the criteria for the exercise in November and banks had to submit their information to the Fed by Jan. 9.

Tarullo acknowledged that the tests need improvement as well. He said the Fed plans to create an advisory group of academics and experts to consider changes to the annual regulatory bank physical. (Reporting by Dave Clarke; Editing by Tim Dobbyn)

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