Fed advises US banks to lift capital targets The largest US banks should hold regulatory capital beyond their own internal targets to better prepare them for periods of market stress, according to a study published by the Federal Reserve on Monday. The study, which examined banks" approaches to the Fed's recent stress tests, also said that while banks had "considerably improved" their regulatory capital planning in recent years, they had "more work to do to enhance their practices." Banks have at times criticised the Fed for the way it administers its annual industry stress tests, which were first run in 2009 as a way of gauging banks" preparedness for a future financial crisis. Monday's suggestion that banks should hold capital beyond their own goals is likely to fuel speculation that the Fed has in effect created another minimum capital requirement for the industry. The biggest banks should "establish capital targets above their capital goals to ensure that capital levels will not fall below the goals during periods of stress," the US central bank said. The goals and targets should be specified in the capital policy and reviewed and approved by the board. The Fed noted that some of the 18 banks that have so far been included in the tests "continue to fall short" in some areas. Some of the banks did not have clear enough capital policies, while others generated loss estimates that did not fully take into account the full impact of stressed markets. Others had "less-than-robust" controls around their capital planning processes, the Fed said. More recent stress tests have allowed the Fed to approve capital returns to banks" investors, in addition to measuring the companies" resistance to adverse markets. This year's "Comprehensive Capital Assessment Review" authorised tens of billions of dollars of dividends and share buybacks across the financial industry, but also rebuked two banks for "weaknesses" in their capital planning processes. Officials at the Fed zeroed in on significant discrepancies between their own stress test results and those run internally by Goldman Sachs and JPMorgan Chase. Goldman Sachs had forecast it would lose $6.6bn in a stressed market, about two-thirds lower than the Fed's projection of $20.5bn. JPMorgan said it would lose just $200m - a fraction of the $32.3bn predicted by the US central bank's stress test. "The leading capital planning practices identified in this paper will continue to evolve as new data become available, economic conditions change, new products and businesses introduce new risks, and estimation techniques advance further," the Fed said. Such advances in capital planning practices will enhance the health and stability of individual bank holding companies and of the overall banking system.