Federal Reserve Board Paper Reviews Large Bank Capital Planning

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On August 19, the Federal Reserve Board released a paper that details its expectations for internal capital planning at large bank holding companies and describes the range of practices the Board has observed during the stress test exercises conducted to date. The Federal Reserve conducts the stress tests annually to assess companies’ capital planning processes and ensure that the processes account for unique risks and result in sufficient capital to enable the institutions to continue lending to households and businesses during times of economic and financial stress. The Board stated that the paper is intended to promote better capital planning at bank holding companies generally, and to provide greater clarity on the standards against which those practices are evaluated as part of the stress test exercise. The Board found that firms needed to improve a number of aspects of their capital planning processes, including their accounting for risks most relevant to the specific business activities, their methods of projecting the effect of certain stresses on their capital needs, and their governance of the capital planning processes, and emphasized that bank holding companies, when considering their capital needs, should focus on the specific risks they could face under potentially stressful conditions.