The Federal Reserve on March 7 released “stress test” results for the nation’s 18 largest banks, and data showed that 17 have enough capital so that in the event of a sharp economic downturn they could continue lending without large-scale government intervention, The Wall Street Journal reported.
Only Ally Financial, which is trying to divest its mortgage unit through bankruptcy proceedings, posted capital levels that failed to meet the Fed's minimum standards. The Journal reported that Ally called the test “fundamentally flawed and…inconsistent with historical experience in the most stressed periods in our business.”
While almost all banks showed they would have enough capital, some of the largest ranked at the bottom of the Fed’s list of published minimum capital ratios to reach Tier 1 common level. The Tier 1 common ratio measures high-quality capital as a share of risk-weighted assets. The Fed requires a 5 percent minimum allowance. Morgan Stanley had 5.7 percent, Goldman Sachs had 5.8 percent, JPMorgan had 6.3 percent and Bank of America had 6.8 percent. By contrast, the Tier 1 common level at Bank of New York Mellon Corp. was 13.2 percent.
Noting the success of most banks, Fed Gov. Daniel Tarullo said that “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,” the Journal reported.
Nevertheless, in the event of a sharp economic downturn with a 12 percent unemployment rate and sharp decrease in stock indexes, banks still would take a hit. Combined, the 18 banks would post losses of $462 billion.
The Fed estimates indicate that Bank of America would lose $51.8 billion, JPMorgan would lose $32.3 billion and Citigroup would lose $28.6 billion.
The results of the Fed’s annual stress tests do not indicate a clear “pass” or “fail,” as they do not take into account banks’ latest dividend and share buyback proposals. Banks can alter capital plans after receiving stress test results, and they have 48 hours to resubmit a capital proposal to the Fed.
Frederick Cannon, director of research at investment bank and broker Keefe, Bruyette & Woods, told the Journal that because the nation’s biggest banks have consistently ranked lower than many regional lenders he still advocates downsizing the biggest banks.