The Federal Reserve announced it would no longer flunk banks based on operational or risk management lapses during its annual health check of the country’s domestic banks.
The “qualitative” portion of the 2019 test, however, will still apply to the US subsidiaries of five foreign banks subject to the annual exam.
The move, which is a big win for major banks, such as Goldman Sachs Group, Morgan Stanley and JP Morgan, Bank of America and Citigroup, forms part of a broader effort by the Fed to overhaul its annual “stress-testing” process, which the industry has long criticized as too onerous and opaque.
Since the 2007-09 global financial crisis, the Fed has put the country’s lenders through strict annual tests to see whether they would have enough capital to withstand a major economic downturn.
For the largest lenders, that test also included a so-called “qualitative objection,” that gives the Fed the discretion to fail banks due to risk management or operational failures, even if they have sufficient capital.
Most banks that have failed the tests in the past stumbled on the qualitative objection. Banks that receive an objection are required to adjust their capital distribution plans.
On Wednesday, the Fed said it would eliminate the qualitative objection for most firms “due to the improvements in capital planning made by the largest firms” since the crisis.