(The following statement was released by the rating agency)
CHICAGO, March 08 (Fitch) The first round of this year's
stress tests highlights the relative resilience of U.S. regional
banks in a severe economic stress scenario. The largest trading
banks, on the other hand, will likely face constraints in
aggressive capital distribution plans in part because of severe
assumptions employed in the tests, according to Fitch.
The Fed-administered tests, which analyze the ability of 18
large U.S. financial
institutions to absorb severe economic and market pressure in a
adverse scenario, support the view that most banks' capital and
positions are sufficiently strong to incur heavy losses in their
trading books over a prolonged period (nine quarters). Of the
reviewed, only Ally Financial failed to maintain a Tier 1
capital ratio above
5%, after stresses were applied through the end of 2014.
Importantly, the first review assumes that all institutions
at existing levels and that no additional capital actions
(dividend increases or
share repurchases) take place.
Related results from the Comprehensive Capital Adequacy Review
which factor in banks' planned capital actions, will be released
on March 14.
Based on the results of the first round of Dodd-Frank tests, we
institutions except Ally to meet the Fed's minimum capital
requirements for the
CCAR. This is supported by the fact that banks are able to
capital plans after reviewing first-round results.
Large regional and custodial banks saw less significant declines
Tier 1 capital ratios by year-end 2014 under the severely
Regional institutions, including BB&T, PNC, US Bancorp and Fifth
maintained capital ratios above 7% at the end of 2014 under the
assumptions. Custodial banks, including State Street and Bank of
Mellon, fared best among all institutions in terms of capital
The relative strength of these institutions reflects the smaller
size of their
trading operations and what appears to be relatively harsh
market risk scenarios
applied to the trading and derivative books of the largest U.S.
We believe the projected risk-based capital ratios for the
largest trading banks
were affected significantly by the much higher risk-weighted
under the Market Risk Capital Rule implemented Jan. 1, 2013.
regulatory capital ratios under DFAST are not directly
comparable to last year's
test for the largest institutions -- JP Morgan Chase, Bank of
Citigroup, Goldman Sachs and Morgan Stanley -- due to the
The big six banks also faced a heavier burden as a result of the
and scope of the global market shock used in the severely
adverse case. The
global market stress was applied early in the testing horizon,
losses on trading banks and magnifying declines in capital
relative to the other
banks. Trading, private equity and derivative positions of the
big six banks
were subject to this instantaneous shock.
For the most part, projected trading and counterparty losses for
the big six
banks under the Fed's test were not significantly different from
the banks' own
estimates, provided separately. As an example, Goldman Sachs's
estimate of $23.3
billion in losses by the end of 2014 was only modestly lower
than the stress
test result of $24.9 billion.
Citigroup fared significantly better in this year's stress test
2012. Following the release of test results, the bank has
already announced its
request to repurchase $1.2 billion in shares, aimed at
offsetting dilution. Citi
has no plans to increase its dividend payout.
Stresses applied in the tests appeared quite onerous. The
scenario assumes a sharp economic contraction beginning in 2013,
with the U.S.
unemployment rate rising by four percentage points to almost
and commercial real estate prices are assumed to fall by almost
20% by year-end
2014, and equity prices are assumed to fall by 50% from
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The above article originally appeared as a post on the Fitch
Wire credit market
commentary page. The original article can be accessed at
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