All But One Major U.S. Bank Passes Stress Tests
According to the summary results of bank stress tests announced by the Federal Reserve, the 30 largest banking institutions in the U.S. are collectively better positioned to continue to lend to households and businesses and to meet their financial commitments in an extremely severe economic downturn than they were five years ago. This result reflects continued broad improvement in their capital positions since the financial crisis.
Reflecting the severity of the most extreme stress scenario – which features a deep recession with a sharp rise in the unemployment rate, a drop in equity prices of nearly 50%, and a decline in house prices to levels last seen in 2001 – projected loan losses at the 30 bank holding companies in the latest stress tests would total $366 billion during the nine quarters of the hypothetical stress scenario.
The aggregate tier 1 common capital ratio, which compares high-quality capital to risk-weighted assets, would fall from an actual 11.5% in the third quarter of 2013 to the minimum level of 7.6% in the hypothetical stress scenario. That minimum post-stress number is significantly higher than the 30 firms’ actual tier 1 common ratio of 5.5% measured in the beginning of 2009. A review of the data showed that Zions Bancorp, with a minimum level of 3.5%, was the only bank that failed to meet the Fed’s minimum level of capital to withstand a crisis.
“The annual stress test is one of the Federal Reserve’s most important tools to gauge the resiliency of the financial sector and to help ensure that the largest firms have strong capital positions,” Federal Reserve Governor Daniel K. Tarullo said. “Each year we are making substantial improvements, which have helped make the process even stronger than when we first conducted the stress tests in the midst of the financial crisis five years ago.”
This is the fourth round of stress tests led by the Federal Reserve since the tests in 2009 and is the second year that the Federal Reserve has conducted stress tests pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act.
To read the Federal Reserve news release, click here.
To read the Stress Test Methodology and Results, click here.