Fed: Largest Banks Much Stronger Post Financial Crisis
The Federal Reserve announced that the nation’s largest bank holding companies have continued to improve their ability to withstand an extremely adverse hypothetical economic scenario and are collectively in a much stronger capital position than before the financial crisis, according to the summary results of bank stress tests.
Reflecting the severity of the stress scenario – which includes a peak unemployment rate of 12.1%, a drop in equity prices of more than 50%, a decline in housing prices of more than 20%, and a sharp market shock for the largest trading firms – projected losses at the 18 bank holding companies would total $462 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 11.1% in the third quarter of 2012 to 7.7% in the fourth quarter of 2014 in the hypothetical stress scenario.
The Fed said 17 of the 18 largest U.S. banks could weather a sharp economic downturn with adequate buffers against losses, potentially clearing the way for billions of dollars in higher dividend payments and larger share buybacks. The results show banks have bounced back since being at the center of the worst financial crisis since the Great Depression, bolstered by billions of dollars in taxpayer bailouts and balance-sheet improvements forced by regulators.
Fed officials caution that the results of the annual “stress tests” don’t indicate a clear “pass” or “fail,” because they don’t incorporate the latest dividend and share-buyback plans. Individual banks received stress-test results midday Thursday, as well as partial information on the Fed’s analysis of their capital plans. The banks then had individual conference calls with the central bank, according to a person who participated in one of the calls.
The Fed said despite the large hypothetical declines, the aggregate post-stress capital ratio exceeds the actual aggregate tier 1 common ratio for the 18 firms of approximately 5.6% at the end of 2008, prior to the government stress tests conducted in the midst of the financial crisis in early 2009. This is the third round of stress tests led by the Federal Reserve since the tests in 2009, but is the first year that the Federal Reserve has conducted stress tests pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Federal Reserve’s implementing regulations.
“The stress tests are a tool to gauge the resiliency of the financial sector,” Federal Reserve Governor Daniel K. Tarullo said. “Significant increases in both the quality and quantity of bank capital during the past four years help ensure that banks can continue to lend to consumers and businesses, even in times of economic difficulty.”
To read the Federal Reserve news release click here.
To read a related story that appeared in the Wall Street Journal click here.