The Federal Reserve said on Monday that while large bank holding firms have enhanced their capital planning processes, more work must be done to improve their capital assessment procedures.
In the paper, the Fed said bank holding companies should focus on the specific risks they face under economically stressful conditions when considering their capital needs.
“Indeed, designing an internal capital planning process that simply seeks to mirror the Federal Reserve’s stress testing is a weak practice,” the Fed said in the paper. “Many lagging practices identified in this publication involve modeling approaches or BHC stress scenarios that fail to reflect BHC-specific factors or that rely on generic assumptions or ‘standard’ modeling techniques, without sufficient consideration of whether those assumptions or techniques are the most appropriate ones for the BHC.”
The Fed said BHCs should be able to demonstrate how their identified risks are accounted for in their capital planning processes,” adding that BHCs should make note of how omitted risks are accounted for in other aspects of the capital planning process.
Additionally, the Fed said that large, complex BHCs face risks other than credit or market risk that are difficult to quantify or are not attributable to any specific company-wide scenarios evaluated as part of scenario-based stress testing.
“There is a wide range of practices around how BHCs account for other risks as part of their capital planning process,” the Fed said. “To the extent possible, BHCs should incorporate the effect of these other risks into their projections of net income over the nine-quarter horizon. BHCs should clearly articulate and support any relevant assumptions and the methods used to quantify the effect of other risks on their revenue, expenses or losses.”