US Fed stress tests: Credit Suisse to address 'limited' weakness

Credit Suisse's American operations had poor methods for projecting trading losses in an economic crisis, the Fed found

Credit Suisse's US operations have until late October to address flaws in how the bank manages risks it could face in times of stress, the Federal Reserve said Thursday. But the Fed did not object outright to the capital plans of any of 18 major US banks included in this year's round of so-called stress tests, finding the financial system resilient overall. "The stress tests have confirmed that the largest banks are both well capitalized and place a high priority on strong capital planning practices," Randal Quarles, the Fed's vice chair for banking supervision, said in a statement. The results free the banks to make billions in shareholder payouts, but Credit Suisse may not increase the payments until it satisfied the Fed's objections. The bank must address "limited weaknesses in its capital planning process," the statement said. The results should also allow officials at Deutsche Bank a sigh of relief, given that the German lender's US operations failed last year's stress tests due to what the Fed called "widespread and critical deficiencies." However, in a call with reporters, Fed officials said that while DB USA had made progress it had still had room to improve. The results announced Thursday built on findings announced last week in which the Fed said the 18 largest US banks had sufficient funds to continue lending and paying dividends even if the US economy shrinks by eight percent, Wall Street nosedives and unemployment jumps to 10 percent. The second round of tests evaluated how the banks' would fare in such a scenario given their plans for dividend payments and share buybacks -- as well as how they forecast what their needs could be in times of economic stress. - Two US banks' close call - The banks represent 70 percent of all assets held by US financial firms. Credit Suisse's American banking operations received a "conditional non-objection," requiring the bank to fix deficiencies in how it forecasts trading losses under in a high-stress scenario. As a result, the bank cannot increase payouts until it resolves the Fed's concerns. Officials stressed that the tests did not involve any foreign banks' parent companies, only their US holding companies. In a statement, Credit Suisse Holdings USA said it was committed to effective oversight. "We acknowledge the concerns relayed by the Fed and fully expect to remediate the issues by the October deadline given," said Eric Varvel, president and chief executive. Last year, both Goldman Sachs and Morgan Stanley also received the "middle ground" non-objection. This year, JPMorgan Chase and Capital One had to submit adjusted capital plans after their initial plans caused them to fall below the minimum ratios of capital to risk assets that regulators deem safe. Capital ratios measure a bank's ability to absorb losses. The Fed this year conducted its ninth round of stress tests intended to ensure the banking system does not relive the near-collapse of the 2008 global financial crisis. Since the tests began, the industry has more than doubled the capital available to absorb losses to $800 billion, according to the central bank. However, since President Donald Trump took office with a deregulatory agenda, the Fed has progressively relaxed the scope of the tests, raising the threshold for inclusion in its strictest requirements and narrowing the ways in which banks can fail. Credit Suisse's American operations had poor methods for projecting trading losses in an economic crisis, the Fed found