Daily News: March 14, 2012

Fifteen of U.S. Largest Banks Pass Stress Test


The Federal Reserve said 15 of the 19 bank holding companies that were the subject of a stress test were estimated to be able to maintain capital rations above all four of the regulatory minimum levels under an extremely adverse hypothetical economic scenario. The four banks that failed to show they enough capital to survive another economic downturn included Citigroup, SunTrust, Ally Financial and MetLife.

Investors cheered the news when many of the banks that passed the stress tests said they planned to return capital to shareholders. For banks that failed, the Fed can stop banks from paying stock dividends or buying back their own stock. The Fed can also force them to raise money by selling additional stock or issuing debt.

The Fed announced summary results of the latest round of bank stress tests, which show that the majority of the largest U.S. banks would continue to meet supervisory expectations for capital adequacy despite large project losses in an extremely adverse hypothetical economic scenario. The exercise was intended to evaluate whether firms would have sufficient capital in times of severe economic and financial strength to continue to lend to households and businesses.

The test included a peak unemployment rate of 13%, a 50% drop in equity prices and a 21% decline in housing prices. Reflecting this scenario, losses at the 19 bank holding companies was estimated to total $534 billion during the nine quarters of the hypothetical stress scenario.

To read the Federal Reserve news release, click here.