Fed Wants Big Banks to Submit Capital Plans

     WASHINGTON (CN) – Bank holding companies with more than $50 billion in assets would be required to submit annual capital plans to the Federal Reserve and notify the regulator before making any major capital disbursements such as stock-buy backs or dividend payments, under new rules proposed by the Fed.

     In the plans, banks would have to show that they have made reasonable assumptions about how risky their short term investment portfolios really are and that they have sufficient cash on hand to cover consumer deposits and provide credit in the event of an economic slump.
     If the Fed were to find the capital plan lacking, the bank would have to receive approval from the regulator before making significant distributions of capital to shareholders.
     According to the Fed, the reporting is necessary because in the years before the recent financial crisis many banks made large capital distributions “without due consideration of the effects that a prolonged economic downturn could have on their capital adequacy and ability to continue to operate … during times of economic and financial stress.”
     The proposal follows the Fed’s Comprehensive Capital Analysis and Review conducted earlier this year that analyzed the capital planning process of the 19 largest bank holding companies in the United States.
As a result of that review, the Fed approved many share repurchase and dividend distribution plans.
     Under existing regulations, large banks already are required to maintain risk-based capital ratios to cover deposits and operations, but the Fed said that it believes the largest banks “should operate with capital positions well above the minimum regulatory capital ratios” and that it is “appropriate to hold large bank holding companies to an elevated capital planning standard because of the elevated risk” they pose to financial system should they fail.
     As of March 31, the Fed said that there are 35 bank holding companies with assets of at least $50 billion, and that the level of detail and analysis of each of those firm’s reports would depend on the “size, complexity, risk profile and scope of operations.”
     While the Fed has always been concerned about banks having enough cash to cover deposits, it has become increasingly concerned about the complexity of the financial transactions that banks engage in and that the real risks of such transactions are not adequately understood.
     In a 1999 advisory letter to the banking industry the Fed identified four elements of a sound capital planning process that went beyond the simple risk-based capital ratios required by regulations: identify and measure all material risks; relate capital to the level of risk; state explicit capital adequacy goals with respect to risk; and assess conformity of the risk to the institution’s stated objectives for being in business such as providing loans to consumers.
     The new reporting requirements include those four elements and are longer advisory. The Fed is asking for public comments on the proposed rule and plans to institute the required reviews in 2012.
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