The Federal Reserve said it will expand a capital-planning program to the 35 largest U.S. banks in an effort to improve the soundness of the financial system.
Banks with at least $50 billion in assets will be required to conduct annual exams to “ensure that institutions have robust, forward-looking capital planning processes that account for their unique risks and that permit continued operations during times of economic and financial stress,” the Fed said today in a statement in Washington.
The plan expands the scope of such reviews, which were last conducted at the 19 largest banks, including Wells Fargo & Co. and JPMorgan Chase & Co. Today’s proposal “institutionalizes” the reviews, the Fed said in its statement.
The Fed said it plans to complete details of the proposal later this year and begin annual reviews in early 2012. Bank boards would be required to approve and submit capital plans to the central bank. If a plan is rejected, the company would be required to get Fed approval before making any distributions of capital.
The KBW Bank Index, which tracks 24 U.S. financial institutions, extended losses after the Fed announcement, falling 1.9 percent to 46.01 at 11:10 a.m. in New York. The Standard & Poor’s 500 Index slid 1.4 percent to 1,271.32.
“During the years leading up to the recent financial crisis, many bank holding companies made significant distributions of capital, in the form of stock repurchases and dividends, without due consideration of the effects that a prolonged economic downturn could have on their capital adequacy,” the Fed said in its proposed rule.
The Dodd-Frank Act, passed last year, gives the Fed new authority to control the lending and risk taking of the largest, most “systemically important” banks.
While the capital plans aren’t required under Dodd-Frank, “the Board believes that it is appropriate to hold large bank holding companies to an elevated capital planning standard because of the elevated risk posed to the financial system,” the Fed said.
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