Bank report cards will weigh character as much as capital
By Ian Katz
Conduct is under scrutiny at the largest U.S. banks including Citigroup and Goldman Sachs, which get their annual report cards Wednesday when the Federal Reserve releases results from the second of two phases of this year’s stress tests. Fed policy makers have been on something of a crusade lately about bank behavior. In addition to assessments of the banks’ capital plans, this week’s exams include so-called qualitative judgments the Fed makes on how the banks identify and manage risk, and whether they have good corporate governance and internal controls. It’s akin to a character test, and the outcome can be hard for banks to predict. Capital can be quantified; the quality of a firm’s board of directors can’t be. In other words, banks can fail tomorrow even if they show they would survive “an asteroid hitting New York,” said Karen Shaw Petrou, managing partner at Federal Financial Analytics Inc., a Washington consulting firm whose clients include the world’s largest banks.