Five United States bank holding companies failed stress testing this year by the Federal Reserve, four on qualitative grounds.
In the results of this year’s Comprehensive Capital Analysis and Review (CCAR), the Fed objected to the capital plans of Citigroup, RBS Citizens Financial Group, Santander Holdings USA and HSBC North America Holdings Inc., on qualitative grounds. It objected to Zions Bancorporation’s capital plans on quantitative grounds: Simply put, the company’s capital ratios, at 3.6 percent, are too low.
"I was pretty surprised at the large number of failures in the new banks," said Russell Hughes, a product manager at Primatics Financial. "These banks have had a long time to prepare for it, especially HSBC and RBS. It shouldn’t have been too big a surprise, what was coming, and the regulators have been very proactive in communicating with the banks as to what their expectations are."
In a report detailing the results of this year’s stress testing, the Fed said that while Citigroup had made considerable progress in improving its general risk management practices over the past few years, the $1.9 trillion bank holding company simply did not meet regulators’ heightened expectations and had not improved on several areas regulators previously identified as needing improvement. Specifically, the Fed found fault with Citigroup’s models for projecting revenues and losses under a stressful scenario and its ability to develop scenarios for its own internal stress testing.
"Citibank failing was a surprise," Hughes said. "They failed two years ago," leading to the departure of its previous CEO. "Other banks, when they’ve failed this test, have responded by aggressively overhauling and improving their stress testing processes."
The Fed cited HSBC and RBS Citizens for inadequate governance and weak internal controls objected to Santander’s capital plans due to "widespread and significant deficiencies," including governance, internal controls, risk identification and management and management information system.
When the Fed objects to a bank holding company’s capital plan, that company may not make any increase in its capital distributions, unless the Fed specifies otherwise in writing.
"In the 2013 exercise, a lot of the regulators’ focus was on the credit models and the models used to estimate losses. This year, the Fed has shifted or added focus to the models used to estimate new business and revenue," Hughes said. "That’s something we’d heard they were giving a lot more attention to, and it’s shown up in the results for Citi and the other banks that failed for qualitative reasons."
The Fed also noted in its report that the 30 bank holding companies it examined in this year’s CCAR hold 80 percent of the total assets across all U.S. bank holding companies.
Email: lalix@thewarrengroup.com
