"A key lesson from the recent financial crisis is that many financial companies simply failed to adequately identify the potential exposures and risks stemming from their firm-wide activities"
- The Federal Reserve
Five years have passed since one of the most costly financial crises in the history of the world's largest economy, and 18 country's largest banks are still falling short in at least one of five areas crucial to risk management and capital planning. Therefore, the Federal Reserve pushed these banks to assess their own potential risks and financial needs, reinforcing a view banks will have to increase their capital or curtail dividends and even share buyback in order to satisfy regulators. The Fed also stressed out that even though many banks have already made progress in evaluating and preparing themselves to withstand an economic slowdown, there is still plenty of room for advancement and many things have to be done.
The so-called stress tests have become a key tool for U.S. regulators to monitor the health of the financial sector, after the 2007-2009 meltdown. These tests are aimed to determine whether banks are maintaining the adequate capital levels by modelling a situation, where banks would face a hypothetical market shock without government's support. The next round of test will start this fall, with the 18 firms that already participated this year, additional 12 banks with more than $50 billion in assets will be included as well.
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