Fed to review stress test procedures after correction

By Douwe Miedema

WASHINGTON (Reuters) - The Federal Reserve on Saturday said it was reviewing the procedures of a closely watched exam banks must pass each year to prove their robustness after it had to correct the results.

The U.S. central bank, which regards these so-called stress tests as an increasingly important tool in safeguarding the health of the financial industry after the crisis, could tweak its procedures as a result, a spokeswoman said.

"We are looking at how the error happened and prevent it from happening again," the spokeswoman said.

The Fed on Wednesday rejected Citigroup's plans for a higher payout to shareholders because of the outcome of the tests, the second time in three years that the bank has failed to win the Fed's approval for its plans.

It was a setback for Chief Executive Michael Corbat, who has been working to repair Citi's relationship with regulators since taking the job late in 2012, and the bank's shares fell more than 5 percent after the news.

On March 21, the Fed had to change the results for a number of the 30 banks in the annual health check, which simulates the onslaught of a crisis as big as the 2007-09 credit meltdown, one day after it posted the results.

The correction did however not lead to a revision of who had passed the exam, and most of the banks either had no change in their capital ratios under stress, or at most a 0.1 percentage point difference.

The Fed said the ratios were adjusted due to inconsistencies in the way the tests handled capital actions in the fourth quarter of 2013 and assumptions about compensation-related issues.

A review of the process happened every year, the spokeswoman added. The news was first reported by The Wall Street Journal.

(Editing by James Dalgleish)