Tags: federal reserve | bank | stress tests | wall street

Fed Crusade On Wall Street Culture to Show in Stress Test Results

Wednesday, 11 Mar 2015 06:11 AM

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.

Fed Chair Janet Yellen said last week that bankers have been sometimes brazen in their ethical failures, and Fed Governor Daniel Tarullo and New York Fed President William C. Dudley have both been critical of financial firm culture. Though the recent scandals involving bank manipulation in a market for short-term money and foreign-exchange markets aren't part of the tests, the ethical issue is relevant because the qualitative tests focus on banks' boards and senior management.

Four of the five firms that didn't pass last year's stress tests — Citigroup, and the U.S. units of Royal Bank of Scotland, HSBC and Banco Santander — failed on qualitative grounds. (Zions Bancorporation flunked for being below minimum capital levels.)

The banks have "made a very strong effort in this round to improve their qualitative criteria,'' Petrou said. "But typically there are laggards here, and it wouldn't surprise me if it's not just the foreign banks for which the qualitative issues are culturally, particularly complicated.''


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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.
federal reserve, bank, stress tests, wall street
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2015-11-11
Wednesday, 11 Mar 2015 06:11 AM
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