US banks have "room for improvement" Daniel Tarullo, the US Federal Reserve governor in charge of controversial stress tests on the largest US banks, said on Tuesday there was "room for improvement at virtually every firm" in the way they managed their capital. The Fed official told a meeting in Chicago that the central bank's initiative of testing how banks would fare in a severe global economic downturn and assessing how they planned for capital distribution had shown weaknesses, "some ... significant," but overall financial groups were much stronger than they were before the 2008 crisis. In results published last month, Citigroup was the most high-profile company to fail the stress tests, after taking planned capital distributions into account, and is expected to resubmit a scaled-back plan to the Fed, with lower payouts for shareholders. Since the crisis banks have had to ask permission from the Fed if they want to increase their dividend payouts or share buybacks. Only banks that can demonstrate they will remain above 5 per cent core tier one capital under the stress scenario are allowed to go ahead with their plans to return capital to shareholders. They must also show they are on course to meet tougher international Basel III capital standards. Banks are privately scathing, insiders say, about the exercise, arguing that the Fed's modelling was awry in how it measured bank losses in a scenario in which the US unemployment rate shot up to 13 per cent and there were heavy losses on eurozone government bonds. They also argue it is nonsensical to imagine that banks would continue dividends and buybacks in a fresh financial crisis and so that measure is not useful. Citi, for example, passed the stress test if its shareholder payout is omitted. In response to criticism, Mr Tarullo said the Fed would form an advisory group of external economists and would hold a "modelling symposium" in which the banks could discuss their issues. He said this would "reduce the "black box" feeling" of the tests. He also pledged better communication between officials and bank risk officers but he defended keeping the precise workings of the Fed's models secret. Fed officials fear that more transparency would allow banks to "game" the system, shaping their portfolios to score better on the Fed's models. Mr Tarullo said it may seem obvious that banks would cancel distributions to shareholders in the stress scenario but "the fact that some firms failed to do so in 2007 and 2008" made it valid to consider they do not. Public disclosures of the results, the degree of which was increased this year as part of the Fed's aim to increase "market discipline," "appear to have struck the right balance," Mr Tarullo said. Some banks are worried that too much information is being made public.