Most large banks appear to have been sailing through the annual "health checkups" they have had to undergo since the financial crisis.
But on Monday, the Federal Reserve, a prominent bank regulator, described some significant shortcomings in the banks’ responses to the so-called stress tests.
Despite the severity of the recent housing bust, the Fed said some banks weren’t taking into account the possibility of falling house prices when valuing certain mortgage-related assets for the tests.
In other cases, banks assumed they would be strong enough to take business away from competitors in stressed times.
The Fed’s findings are part of its efforts to improve the stress tests, which aim to ensure banks have the financial strength to withstand shocks in the economy and markets.
The tests have created tension between the Fed and the banks. One reason is that the tests can determine how much a bank may pay out in dividends or spend on stock buybacks.
In March, the Fed announced that two out of 18 banks had effectively failed the latest tests. One was BB&T, a regional bank based in Winston-Salem, N.C. The other was Ally Financial, a consumer lender that has struggled to right itself since the financial crisis and still has not fully repaid its bailout money.
In its review released Monday, the Fed appeared most concerned that banks were applying the tests too generally. In other words, such banks didn’t pay enough attention to the risks that were particular to their assets and operations.
The Fed’s review also contained hints that some banks still operate with some of the same hubris that got them into trouble during the crisis.
For instance, some "assumed that they would be viewed as strong compared to their competitors in a stress scenario and would therefore experience increased market share."