Fed looks beyond banks’ financial target
By Gina Chon in Washington, Camilla Hall in New York and Martin Arnold in London
Banks on both sides of the Atlantic are learning the hard way that hitting the financial targets in the Federal Reserve’s annual stress tests may not be enough. Four of the five banks that had their capital plans rejected on Wednesday, crimping their ability to deploy their cash on dividends and share buybacks, met the headline number of a 5 per cent minimum tier one common capital ratio. Yet the central bank still punished Citigroup and the US units of HSBC, Royal Bank of Scotland and Santander on “qualitative” measures such as their ability to project how another financial crisis would affect their revenues, and what losses they would suffer. The Fed’s calculation took in whether banks are appropriately addressing potential risks, the strength of their capital planning and risk management practices, and corporate governance issues. Only one bank, Utah-based Zions Bancorp, was rejected because it failed to meet the minimum tier one common capital ratio of 5 per cent. “Past stress tests were largely pin-the-tail-on-the-donkey exercises – that is, a big bank hit the capital number and it won the [Fed’s] blessing to pay dividends,” said Karen Shaw Petrou, a managing partner at Federal Financial Analytics.