WASHINGTON — The Federal Reserve's annual "stress tests" of major U.S. banks have become better able to detect risks, Chairman Ben Bernanke said Monday night. He said the tests show that the banking industry has grown much healthier since the financial crisis.
Speaking in Atlanta, Bernanke noted that this year's tests showed that 18 of the biggest banks had collectively doubled the cushions they hold against losses since the first tests were run in 2009. He says the tests are providing vital information to regulators.
The latest test results were released last month. They showed that all but one of the 18 banks were better prepared to withstand a severe U.S. recession and an upheaval in financial markets. The tests are used to determine whether the banks can increase dividends or repurchase shares.
Bernanke's comments came in a speech to a financial markets conference sponsored by the Federal Reserve Bank of Atlanta. He said he viewed the first stress test conducted in 2009, months after the financial crisis struck, as "one of the critical turning points in the crisis."
"It provided anxious investors with something they craved: credible information about prospective losses at banks," he said.
Bernanke said that in the ensuing years, the Fed has worked to improve the stress tests so they could serve as a resource for banking regulators to monitor and detect threats to the financial system.
During a question period after the speech, Bernanke was asked what kept him up at night.
"Let me assure you, there are no major problems you haven't heard about," he said in response. He said his list of concerns include whether the recovery will gain momentum and when the country will get back to full employment.
He said the economic situation in Europe also remains complex, as that region struggles to deal with its debt crisis. He said in the United States, a major issue remains how to deal with high budget deficits without compromising the economic recovery.
Bernanke made no comments during his appearance that suggested he was ready to modify the low-interest rate policies the Fed is pursuing in an effort to boost economic growth and lower unemployment.
The stress tests have been criticized by some banks because the central bank has kept secret the full details of the computer models it is using to evaluate each bank. The Fed has defended this practice. It has argued that it is similar to teachers not giving students specific questions that will appear on a test to guard against students memorizing the answers.
"We hear criticism from bankers that our models are a `black box' which frustrates their efforts to anticipate our supervisory findings," Bernanke said. He said that over time, the banks should better understand the standards the tests are measuring.
In this year's test, the Fed approved dividend payment plans and stock repurchase plans for 14 of the 18 banks outright.
Two of the banks, JPMorgan Chase and Goldman Sachs, were told by the Fed that they could proceed with their plans but would need to submit new capital plans. Two other banks, Ally Financial and BB&T, were forbidden by the Fed to go through with their dividend increases and share buybacks.
Ally Financial, the former financing arm of General Motors, fared the worst on the stress test. The Fed's data showed that Ally's projected capital level was below the minimum the Fed thinks a bank would need to survive a severe recession. Ally officials said they believed the Fed's testing models were unreasonable.
BB&T, based in Winston-Salem, N.C., said it would resubmit its capital plan and that it believes that it will be able to address the factors which had led to the Fed's objections.
Associated Press reporter Ray Henry in Atlanta contributed to this report.
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Sanford "Sandy" Weill
The former <a href="http://www.huffingtonpost.com/2012/07/25/sandy-weill-cnbc-break-up-big-banks_n_1701274.html">Citigroup Chairman and CEO told CNBC in 2012 that</a> "we should probably... split up investment banking from banking, have banks be deposit takers, have banks make commercial loans and real estate loans, and have banks do something that's not going to risk the taxpayer dollars, that's not going to be too big to fail."
Retired Citigroup chairman <a href="http://www.nytimes.com/2009/10/23/opinion/l23volcker.html?_r=0">John S. Reed wrote to the New York Times in 2009</a>: "Some kind of separation between institutions that deal primarily in the capital markets and those involved in more traditional deposit-taking and working-capital finance makes sense."
Phil Purcell, former chairman and CEO of Morgan Stanley, <a href="http://online.wsj.com/article/SB10001424052702304765304577480743265772620.html" target="_hplink">argued in a Wall Street Journal op-ed</a> that the big banks should break their divisions up into separate firms. "These businesses should be spun off to give the value to shareholders and let investment banks be owned privately -- hopefully largely by employees... so that the interests of the owners and bankers are aligned," he wrote.
Former Merill Lynch CEO, David Komansky, is another former megabank CEO calling for the breakup of "too big to fail" banks, <a href="http://economix.blogs.nytimes.com/2012/08/02/under-pressure-megabanks-rely-on-three-myths/" target="_hplink">according to Simon Johnson.</a> Komansky told Bloomberg TV that he <a href="http://www.bloomberg.com/video/59862858-komansky-says-he-regrets-role-in-glass-steagall-repeal.html" target="_hplink">"regrets" calling for the repeal of Glass-Steagall,</a> which allowed banks to become bigger than ever.
Former Citigroup CFO Sallie Krawcheck has argued that big banks are simply <a href="http://www.huffingtonpost.com/2012/06/12/sallie-krawcheck-jpmorgan-chase-loss_n_1588989.html" target="_hplink"> too complex to manage.
After announcing the end of his 16-year tenure on the board of <a href="http://www.bloomberg.com/news/2012-04-19/parsons-blames-glass-steagall-repeal-for-crisis.html">Citigroup, Richard Parsons told Bloomberg</a>, "to some extent what we saw in the 2007, 2008 crash was the result of the throwing off of Glass-Steagall. Have we gotten our arms around it yet? I don't think so because the financial-services sector moves so fast."
Scott Shay, the founder and chairman of Signature Bank, wrote in American Banker that <a href="http://www.americanbanker.com/bankthink/the-absurdity-of-too-big-to-fail-banking-1052812-1.html?zkPrintable=1&nopagination=1">"reinstating Glass Steagall should be the highest priority"</a> for financial regulators.