For immediate release The Federal Reserve today issued a supervisory letter which emphasizes the growing need for large and complex banking organizations to maintain strong internal processes to assure that their capital is fully sufficient to support the underlying risks they face as well as to meet minimum regulatory standards.
Capital adequacy is a critical element of a bank's safety and soundness.
The supervisory letter directs examiners to evaluate internal capital management processes to judge whether they meaningfully tie the identification, monitoring, and evaluation of risk to the determination of the institution's capital needs. To support that evaluation, this letter describes the fundamental elements of a sound and comprehensive internal capital adequacy analysis and the key areas of risk it should encompass. This letter grows in part from a recent supervisory review of internal capital management processes at several large complex banking organizations. This review suggests that these processes could be significantly improved, in particular to become better integrated with internal risk measurement and analysis. In providing guidance to examiners and supervisors, this supervisory letter is also intended to encourage such banking organizations to strengthen their risk measurement capabilities as well as to integrate these capabilities more fully in evaluating their own capital adequacy.