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Fed has gone easy on big banks since I left, says former stress tester

  • "Selfishly, I would say that the Fed's gone easy since I left, but of course times are better for the banks as well as for the American economy," Carl Tannenbaum, chief economist at Northern Trust, told CNBC on Thursday.
  • For the first time in seven years, the Federal Reserve did not object to any of the capital plans of the 34 banks it reviewed in the second part of the annual stress tests implemented in the wake of the financial crisis.

The Federal Reserve appears to have gone soft on U.S. banks after the regulator opted to clear every major lender in its latest annual review, according to former Federal Reserve official Carl Tannenbaum.

For the first time in seven years, the Federal Reserve did not object to any of the capital plans of the 34 banks it reviewed in the second part of the annual stress tests implemented in the wake of the financial crisis.

"Well, selfishly I would say that the Fed's gone easy since I left, but of course times are better for the banks as well as for the American economy," Carl Tannenbaum, chief economist at Northern Trust, told CNBC on Thursday. Tannenbaum previously led a team at the Federal Reserve Bank of Chicago whose charter was to analyze financial risk and he also served as the head of the entire Federal Reserve System's risk group in Washington for a year.

"The banks have built up a great deal of capital since the crisis and that's provided a great buffer that separates the shareholders from the public … So banks are in a very good position to begin returning some of that capital to shareholders," he added.

Last Thursday, all 34 banks passed the Dodd-Frank Act Stress Tests for the third time by topping the Fed's requirements for being able to handle a severe recession. Wednesday's results from the Comprehensive Capital Analysis and Review, or CCAR, marked the first time since the test launched seven years ago that the Fed did not object to any of the banks' capital plans.

"I'm pleased that the (stress test) process has motivated all of the largest banks to achieve healthy capital levels and most to substantially improve their capital planning processes," Fed Governor Jerome H. Powell said in a statement on Wednesday.

Capital One Financial was the only bank tested which has been asked to submit a new capital plan by December 28 in order to address "weaknesses in its capital planning process."

'No longer an exercise to demonstrate regulatory authority'

"For shareholders this is clearly very positive but it doesn't take us back to where we were before the crisis," Robin Bew, CEO of The Economist Intelligence Unit, told CNBC on Thursday.

"It's not an exercise anymore in demonstrating that the Fed is capable of really rapping these institutions over the knuckles. We were there a few years ago when I think the public was demanding to see that the regulator was capable of taking on this industry (but) now we are in a slightly different place," he added.

Bew argued the Fed was looking to help the banking industry become more robust in order for it to be able to successfully manage another financial crisis.

—CNBC's Evelyn Chang contributed to this report