U.S. Fed boosts pressure on big banks over capital planning

The U.S. Federal Reserve said Monday that it wanted the largest U.S. banks to pay more attention to their particular vulnerabilities rather than simply applying the regulatory minimums when making their capital plans.

Large bank holding companies have considerably improved their capital planning processes in recent years, but have more work to do to enhance their practices for assessing the capital they need to withstand stressful economic and financial conditions, the central bank said in a 41-page paper.

The Fed said there is still "considerable room for advancement across a number of dimensions" for many banks, calling internal capital planning process that simply seeks to mirror the Fed's stress testing "a weak practice."

"Bank holding companies, when considering their capital needs, should focus on the specific risks they could face under potentially stressful conditions," the Fed said.

Large banks are expected to have effective risk identification, measurement, management, and control processes in place to support their internal capital planning. At the same time, they should be able to demonstrate how their identified risks are accounted for in their capital planning processes, according to the Fed study.

The Fed said robust internal capital planning process should include modeling practices and scenario assumptions that reflect bank-specific factors, because in certain instances, these practices and assumptions may differ considerably from those generic or standard ones used in the annual stress tests.

Stress test is one of the regulatory tools the Fed uses to ensure that financial institutions have robust capital planning processes and adequate capital throughout times of economic and financial stress.

The Fed also said Monday that this year's stress tests will start in the fall and that 12 more firms are expected to join the health checkup.