Daily News: March 9, 2015

Fed: Banks Continue to Build Capital Levels

The largest U.S.-based bank holding companies continue to build their capital levels and to strengthen their ability to lend to households and businesses during a period marked by severe recession and financial market volatility, according to the results of supervisory stress tests announced by the Federal Reserve.

The most severe hypothetical scenario projects that loan losses at the 31 participating bank holding companies would total $340 billion during the nine quarters tested. The “severely adverse” scenario features a deep recession with the unemployment rate peaking at 10%, a decline in home prices of 25%, a stock market drop of nearly 60%, and a notable rise in market volatility.

The 31 firms’ aggregate tier 1 common capital ratio, which compares high-quality capital to risk-weighted assets, would fall from an actual 11.9% in the third quarter of 2014 to a minimum level of 8.2% in the hypothetical stress scenario. This hypothetical post-stress minimum is significantly higher than the 31 firms’ aggregate tier 1 common capital ratio of 5.5% measured in the beginning of 2009.

“Higher capital levels at large banks increase the resiliency of our financial system,” Federal Reserve governor Daniel K. Tarullo said. “Our supervisory stress tests are designed to ensure that these banks have enough capital that they could continue to lend to American businesses and households even in a severe economic downturn.”

This is the fifth round of stress tests led by the Federal Reserve since 2009 and the third round required by the Dodd-Frank Act. The 31 firms tested represent more than 80% of domestic banking assets. The Federal Reserve uses its own independent projections of losses and incomes for each firm.

To view the full Federal Reserve release, click