The Federal Reserve says the nation’s largest banks need to do a better job of determining how much capital they need to cushion against a future crisis.
In a report issued Monday, the Fed said the big banks have made progress in preparing for stresses like those brought by the 2008 financial crisis. But it said they must go further by accounting for specific risks that relate to their business activities.
The Fed has been conducting annual stress tests on the biggest banks since 2009. The next round will include the 18 largest banks and an additional 12 firms that will participate for the first time next year.
The report came as President Barack Obama met Monday with banking regulators for a status report as the five-year anniversary of the financial crisis approaches.
The Fed’s stress tests serve as an annual check-up on the big banks. Under the tests, banks must assume severe weakness in the economy and financial market turmoil, and then calculate the losses they’d incur under those conditions. The banks compare those projected losses with the capital they’re holding to determine whether they’re adequately prepared for a severe downturn.
As a result of the tests, the Fed tells the banks whether they can raise their dividend – the quarterly payout that banks give shareholders. Many retirees living on fixed incomes rely on dividends for a portion of their income.
The tests also govern whether the Fed lets banks buy back more of their own stock, which can help increase the stock price.