All but one major U.S. bank pass Fed's stress test

Thu Mar 7, 2013 6:36pm EST

The headquarters of Morgan Stanley is pictured in New York January 9, 2013. REUTERS/Shannon Stapleton

The headquarters of Morgan Stanley is pictured in New York January 9, 2013.

Credit: Reuters/Shannon Stapleton

(Reuters) - U.S. banks have enough capital to withstand a severe economic downturn, the Federal Reserve said on Thursday, with all but one major bank passing the annual health check of the financial sector.

A stronger economy and banks' efforts to boost their capital since the 2007-2009 U.S. financial crisis helped all 18 participating lenders except Ally Financial meet the minimum hurdle of a 5 percent capital buffer in the Fed's "stress test."

The tests give regulators a view into how the banking sector would respond to a severe recession. The firms in the test represent more than 70 percent of total bank holding company assets in the United States, a senior Fed official said.

"The nation's largest bank holding companies ... are collectively in a much stronger capital position than before the financial crisis," the Fed said in a statement.

Of the four largest U.S. banks, Bank of America (BAC.N), Wells Fargo (WFC.N) and Citigroup (C.N) saw improvements in their minimum Tier 1 common capital ratios, compared to last year's similar test, while JPMorgan Chase (JPM.N) was steady at 6.3 percent.

Citigroup had the highest ratio of the top four at 8.3 percent.

Two Wall Street banks, Morgan Stanley (MS.N) at 5.7 percent and Goldman Sachs (GS.N) at 5.8 percent, showed the two lowest outcomes above the 5 percent threshold.

Stress testing has become a central part of U.S. regulators' efforts to shore up the financial sector after the crisis. The 2010 Dodd-Frank financial oversight law called for the tests to ensure banks have big enough capital cushions to survive a severe recession or other economic jolt.

Regulators also will use the tests to determine whether banks can start returning money to shareholders in the form of dividends or share buybacks. The Fed will not announce those results until next week.

Unlike last year, the first batch of results does not look at the impact of any such payouts. The Fed's 2012 rejection of a dividend boost by Citigroup (C.N) sent its shares tumbling.

To avoid a similar debacle, the Fed is giving banks 48 hours to tweak any capital plans they may have, before releasing decisions on those plans next Thursday.

Citigroup said on Thursday it was not seeking an increase in its current quarterly dividend of one cent per share. It did ask to conduct a $1.2 billion common stock buyback program through the first quarter of 2014.

Under the Fed's toughest stress scenario, which yielded the results disclosed on Thursday, unemployment would spike to 12.1 percent, equity prices would fall more than 50 percent, housing prices would dip more than 20 percent, and the largest trading firms would experience a sharp market shock.

The results showed that the 18 banks' aggregate so-called tier 1 common capital gauge would hit a low of 7.4 percent under the hypothetical stress scenario. That was much better than an actual 5.6 percent at the end of 2008, the Fed said.

"The industry has clearly recovered," said Nancy Bush, a veteran bank analyst and contributing editor with SNL Financial. "But I don't think anybody is going to do anything heroic in terms of rewarding shareholders over the next couple of years, and I think we need to get ready for that reality."

At 1.5 percent, Ally Financial was the only bank to miss the 5 percent target. The U.S. government owns a majority stake in Ally, the former General Motors (GM.N) lending arm, after a series of government bailouts.

The firm is working through the bankruptcy of its Residential Capital unit, and is largely exiting the mortgage business to focus on auto lending. It is also selling its international operations.

Firms that come in below the 5 percent minimum must work with the Fed on a plan to bring their capital back up to the standard, senior Fed officials said.

Aggregate losses at the 18 companies were projected at $462 billion during the nine quarters under the scenario, down from $534 billion in losses at 19 companies last year. MetLife, which was included in last year's test, has since shed its bank holding company and did not participate this year.

A senior Fed official attributed the loss decline to continued writedowns of bad assets, improved underwriting for new loans and improved financial health of borrowers.

(Reporting by Emily Stephenson in Washington and Rick Rothacker in Charlotte, N.C.; Additional reporting by Douwe Miedema and David Henry; Editing by Karey Van Hall and Tim Dobbyn)

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Comments (3)
AdamSmith wrote:
The Fed’s QE is the biggest boon to the wealthy ever witnessed by modern markets.

The Fed has been buying up, from the wealthy, every worthless note the wealthy had been stuck with. The Fed has been buying everything, you name it. Worthless junk that nobody else would buy, the Fed has been buying it for top dollar, taking it off the hands of the wealthy.

The wealthy can barely contain themselves at their good fortune. Who would have thought they could get rid of those worthless pieces of paper? Yet, the Fed has now paid them roughly $1.5 trillion in cold, hard cash.

The wealthy, who had expected to lose everything, are now made richer than ever.

The Fed are very happy to accomodate them using the government’s money.

Once again in life, the wealthy criminal class wins, effortlessly. And the common man is ground into the floor under their heal.

QE is a far greater crime than TARP, and far more subtle for the average citizen to grasp.

Mar 07, 2013 9:31pm EST  --  Report as abuse
ttolstoy wrote:
The Federal Reserve’s so-called “stress tests” have always been useless measures of financial stability because they are based upon hopelessly outdated ideas of what banks do. For example, the stress tests do not account for the vast increase in payments resulting from various derivatives being triggered. For example, banks like Citibank, JP Morgan Chase, Goldman Sachs, and Morgan Stanley are far more vulnerable to derivatives than Ally Bank.

Collectively, the casino bankers have issued about $300 trillion in derivatives of various kinds, which is several times the size of the entire US economy. In the event of recession, tens of trillions worth of credit default swaps may trigger payments, depending on how severe it is. A sharp increase or decrease in interest rates would could trigger hundreds of trillions worth of interest rate swaps. None of this is accounted for by the Fed.

The only thing that the Federal Reserve’s stress tests prove is that the Fed is an incompetent institution that is really nothing more than a private slush fund for the casino bankers, guaranteed by the full faith and credit of all the taxpayers of the USA. It is yet another argument for closing it down, once and for all.

Mar 08, 2013 1:09am EST  --  Report as abuse
fpleti wrote:
OK, maybe I missed it in the piece.


Of all the trivial detail given in the piece, the journalists Emily & Rick, failed to report the most important detail.

Mar 09, 2013 11:11pm EST  --  Report as abuse
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