Federal Reserve Chairman Ben Bernanke indicated on Monday that the central bank is committed to keeping interest rates low to help the economy, lifting shares. The bond markets had begun to price in an earlier hike of short-term interest rates by the Fed as the economy showed signs of improvement. The Fed's commitment to low interest rates means banks will likely have to endure a prolonged period of low spread income on their loans. Investors had been hoping that the rise in yields would boost interest income for banks.
Banks who failed to win approval from the Federal Reserve for their capital deployment plans including Citigroup ( C) and Metlife ( MET) are hoping to understand a little more about the regulator's assumptions in its stress test models, the Wall Street Journal reported citing sources familiar with the matter. The Fed has held conference calls with banks in recent weeks to explain some of its methods as banks try to reconcile the differences between their own loss estimates and that of the regulator. Citigroup's failure to win approval came as a surprise to most analysts and the bank as many had expected the bank to return more capital to shareholders in 2012. However, it just narrowly missed the Fed's minimum capital requirement of 5% in a stressed scenario if it went ahead with its deployment plans. The bank has said it would "engage further with the Federal Reserve" to understand its stress test models. The banks are expected to re-submit their capital return plans to the regulator. However, without an understanding of how the Fed views the risks in their portfolio, banks are left groping in the dark on what would be an acceptable capital return plan. Written by Shanthi Bharatwaj in New York. Readers Also Like: >> Bank Watchdog Is a Paper Tiger >> 7 Health Care Stocks to Weather Supreme Court Challenges