(Adds more details from speech, background)
By Douwe Miedema
WASHINGTON, June 25 (Reuters) - The U.S. Federal Reservewill continue to add new elements to its annual check-up of thehealth of banks, Governor Daniel Tarullo said on Wednesday, tokeep up with change in the financial sector.
The Fed might for instance look closer at the risk of commonexposures among firms in the annual model run known as 'stresstests,' which Tarullo defended as the core element of the Fed'soversight of the banking sector.
"I expect that we will devote more attention to developingthe macroprudential elements of the stress tests," Tarullo saidin the text of a speech he gave in Boston.
The Fed requires banks to submit capital plans that showwhether they can withstand adverse economic scenarios, and canstop the banks from raising dividends or other shareholderpayouts if it deems them insufficient.
This year it rejected plans by Citigroup to buy back$6.4 billion of shares and boost dividends, and also objected toplans from the U.S. units of three European banks: HSBC, RBS and Santander.
It was the second time in three years that Citi flunked, anda blow to Chief Executive Michael Corbat, who has been workinghard to cultivate closer relationships with regulators sincetaking the company's reins in 2012.
The Fed has identified the stress tests as the cornerstoneof their oversight of banks. The European Central Bank also isconducting its own stress tests in Europe as it takes onresponsibility for supervising banks this year.
Tarullo said the Fed might start looking at whether therecould be knock-on effects from banks that started rapidlyselling assets during a crisis, and whether they would stillhave access to credit in times of stress.
But there was no desire to make the tests harder each year,Tarullo said. If that appeared to be the case, it was becausebanks had a long way to go when the Fed started using the testsafter the financial crisis that peaked in 2008, he said.
The Fed also does not have a number in mind for how manybanks should fail the test, Tarullo said.
"This is not a PGA tournament - there is no foreordained cutthat some participants will miss," he said, using a reference tothe way professional golf tournaments are set up.
Tarullo also defended against the idea the stress tests arean opaque process, saying that while the Fed would not disclosethe models it used, it had put a system in place toindependently validate the models. (Reporting by Douwe Miedema; Editing by Chizu Nomiyama and PaulSimao)
HSBC Holdings (HSBA)