Fed tests show banks fall short in planning for worst

WASHINGTON — The 18 largest banks subject to a Federal Reserve stress test this year fell short in at least one of five areas the Fed says are critical to risk management and capital planning.

While many banking companies have improved capital planning techniques and raised capital levels, ‘‘there is still considerable room for advancement across a number of dimensions,’’ Fed supervisors said in a 41-page paper, released Monday, that outlines weaknesses and successes in recent stress tests.

The Fed staff study shows that, after four such tests, some of the largest banks still lack comprehensive systems and policies to model, test, report, and plan for economic calamities.


While highlighting both strengths and weaknesses, the central bank said all of the bank holding companies ‘‘faced challenges across one or more’’ of five areas, and called for analysis tailored to each bank’s business and risk.

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The Fed conducted its first stress test of the largest banks in 2009 to promote transparency of assets and reveal how much money they could lose in an adverse economy. Confidence in banks was low because portfolios were opaque, capital was scarce, and job losses were rising as the economy succumbed to the worst recession since the Great Depression.

Fed chairman Ben Bernanke called the stress tests of 2009 ‘‘one of the critical turning points in the financial crisis.’’ Speaking in April, Bernanke said the tests ‘‘provided anxious investors with something they craved: credible information about prospective losses at banks.’’

Areas where some banking companies ‘‘continue to fall short of leading practice’’ included not being able to show how risks were accounted for and using stress scenarios and modeling techniques that didn’t account for a bank’s particular risks. The Fed was critical of banks that generated projections for loss, revenue, or expenses with approaches ‘‘that were not robust, transparent, and/or repeatable, or that did not fully capture the impact of stressed conditions.’’

The Fed cited examples of ‘‘capital policies that did not clearly articulate’’ a company’s goals and ‘‘did not provide analytical support for how these goals and targets were determined to be appropriate.’’


A common thread through the report is the importance of information systems to decision making.

Banks that had strong information systems ‘‘enabled them to collect, synthesize, analyze, and deliver information quickly and efficiently,’’ the report said.

Still, many banks ‘‘have systems that are antiquated and/or siloed and not fully compatible, requiring substantial human intervention to reconcile across systems.’’