Former Fed Governor Says Central Bank's Independence Is Limited

The first round of the central bank's annual "stress tests" shows that as a group, the 34 big banks have gained strength thanks to a steadily recovering economy.

America's big banks are a step closer to paying billions of dollars to shareholders after the Federal Reserve determined that their cash reserves were large enough to withstand a severe shock to the U.S. economy.

Although the banks, including household names like JPMorgan Chase & Co (JPM.N) and Bank of America Corp (BAC.N), would suffer $383 billion in loan losses in the Fed's most severe scenario, their level of high-quality capital would be substantially higher than the threshold that regulators demand, and an improvement over last year's level. That is much better than the 4.5 percent threshold that regulators demand, and an improvement on the 8.4 percent common equity tier 1 capital ratio assessed a year ago.

Regulatory advocate Marcus Stanley says these stress tests have created a banking system less susceptible to crisis but, "If these stress tests are weakened in the future, they are going to become significantly less reliable". It's far above the 4.5 percent minimum capital level and the 5.5 percent that the banks held at the start of 2009, soon after the crisis hit, the year the first stress tests were performed.

Banks will get the chance to revise their capital plans before next week's results are released.

In testimony to be delivered yesterday, US Federal Reserve Governor Jerome Powell said some reasonable reforms could be in order.

The report said some stress tests should be conducted every two years instead of annually and that they should be limited to the largest banks. Bank executives and many investors hope the Fed will allow lenders to put a lot more capital toward stock buybacks and dividends. The banks undergoing the seventh annual check-up included JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Wells Fargo and Co. - the four biggest US banks by assets.

Citigroup Inc (C.N) fared the best among big Wall Street banks, with a ratio of 9.7 percent.

The Fed can reject a bank's capital plan for either reason.

Goldman Sachs Group's projected loan-loss rate of 8.1 per cent was surpassed only by commercial lenders or card issuers such as American Express, Capital One Financial Corp, and Discover Financial Services.

The Fed has changed the emphasis in stress scenarios from year-to-year to keep banks from managing their portfolios to the test.

Regulators were looking for two key pieces of information.

CIT was added this year to the banks tested by the Fed. "We should continue to tailor our requirements to the size, risk, and complexity of the firms subject to those requirements", he wrote.

  • Wendy Palmer