NEW YORK (Reuters) - The biggest U.S. banks, including JPMorgan Chase & Co (JPM.N) and Bank of America Corp (BAC.N), said that by their own reckoning they are better equipped to withstand a shock to global markets and economies now than they were in March.
The results of internal stress tests released on Monday may have been helped by the banks having built capital levels in recent months as the economy showed some signs of improvement and they earned more money.
But analysts were skeptical of the tests’ results, saying that higher capital ratios and lower loss projections may be less meaningful than they appear. In many cases they are not directly comparable to the tests the banks disclosed in March, known as “stress tests,” which were more closely overseen by the U.S. Federal Reserve. Banks were permitted to craft their own assumptions about what would happen in a global downturn, and their scenarios may differ from the Fed‘s.
“Someone could pass this and fail the stress test,” said Moshe Orenbuch, a bank analyst at Credit Suisse.
Both the self-tests and the Fed’s review are performed by the 18 largest U.S. banks with at least $50 billion in assets, and are required by the Dodd-Frank financial reform law.
In the tests, banks project the financial impact of an economic contraction in the United States and, depending on their geographic exposure, abroad, with high unemployment rates, distressed bond markets and sharp declines in the value of homes and stocks.
In the Fed’s version disclosed every March, the banks and the central bank perform their own stress tests independently, and the two sets of results are released publicly for comparison.
The Fed uses its own barometers to determine whether banks are adequately capitalized, and whether they can use excess capital for acquisitions, dividends or stock repurchases. Earlier this year, the Fed denied capital plans submitted by BB&T Corp (BBT.N) and Ally Financial and criticized the capital planning processes of JPMorgan Chase & Co (JPM.N) and Goldman Sachs Group Inc (GS.N).
No such review comes with the self tests. These tests are based on data as of March 31, projected out to 2015. Banks were ordered to release the summary results of these tests to the broader public between September 15 and September 30.
On Monday, JPMorgan said it would lose $300 million, before taxes, in a severe downturn, but that a measure of its capital known as a Tier 1 common ratio would hit a low of 8.5 percent of its assets. In the March test, it said it would lose less - $200 million, before taxes - but that its tier 1 common level would drop to 7.2 percent.
Bank of America said a severe downturn would pull its tier 1 common capital ratio to as low as 8.4 percent, an improvement from the 7.7 percent minimum it projected earlier in the year.
Goldman Sachs projected pretax losses of $6.2 billion, down from $6.4 billion six months earlier. Goldman projected a sharp drop in revenue and a higher provision for loan losses, but also projected that trading losses would improve by $3.3 billion.
Goldman’s projected minimum Tier 1 common capital ratio was 8.9 percent, up from 8.6 percent in the March test.
Citigroup, whose stress test incorporated downturns in the U.S., Europe, Mexico and Japan, said its Tier 1 common ratio would drop as low as 9.1 percent, better than the 8.4 percent minimum it projected six months earlier.
Banks with smaller investment banking operations reported improvements in projected capital ratios, but not in projected losses.
Wells Fargo & Co (WFC.N), the fourth largest U.S. bank, said it would lose $3.8 billion in a stressed scenario. The projection was more than twice the $1.7 billion loss it detailed six months earlier, with the change attributable a lower revenue projection.
But the bank projected a Tier 1 common capital ratio of 9.9 percent, better than the 8.3 percent it projected earlier in the year. Similarly, Capital One Financial Corp (COF.N) projected higher losses and lower revenue, but better capital metrics.
Reporting by Lauren Tara LaCapra and Peter Rudegeair; Additional reporting by David Henry; Editing by Dan Wilchins and Tim Dobbyn