WASHINGTON, March 5 (Reuters) - The largest U.S. banks and their foreign rivals are facing a tough two-step check-up of their financial health by the Federal Reserve, forcing the firms to get a far better grip on how they measure risk.
In its annual “stress tests”, the Fed gauges whether banks have enough shareholder capital to withstand a severe economic shock like that of the 2007-09 crisis, when taxpayers spent billions of dollars to keep the industry afloat.
On Thursday, it will publish the first leg of the tests, announcing which of the 31 banks have dropped below the 5 percent minimum for top-tier capital.
But the toughest part of the test comes on March 11, when the Fed reveals if the banks get approval for any planned increases in shareholder pay-outs. Last year, four banks failed that hurdle, while only one fell short of the first.
Next week’s review takes a look under the hood of the banks - which Wall Street critics say are “too large to manage” - by scrutinizing whether managers are in truly in control of their firms. And the test is becoming tougher each year.
“If the senior management ... cannot explain how these results were produced, (the regulators are) going to have very little tolerance,” said Ahson Pai, a partner at consulting firm SunGard, who helps large banks with the tests.
Global regulators have forced banks to borrow less to fund their business after the crisis, and the stress tests are increasingly becoming an important instrument for the Fed to test the industry’s resilience.
Deutsche Bank and Spain’s Santander are expected to fail next week’s test, something that was first reported by the Wall Street Journal. It is the first year that Deutsche takes part in the exercise, but it would be the second year in a row that Santander misses the cut.
Both companies declined to comment.
The Fed last year shocked markets by rejecting Citigroup’s dividend boost, a blow for Chief Executive Michael Corbat, who had been working hard to mend fences with regulators after the bank flunked the test under his predecessor in 2012.
The U.S. units of HSBC and RBS were the other two that failed the second test. Zions Bancorp was the only bank to miss the 5 percent hurdle. (Reporting by Douwe Miedema; Editing by Bernard Orr)