Banking

Fed stress tests show 17 of 18 banks weathering severe slump

BLOOMBERG FILE PHOTO/BRENDAN SMIALOWSKI
THE U.S. FEDERAL Reserve building stands in Washington, D.C., U.S.
Posted 3/8/13

WASHINGTON - The Federal Reserve said 17 of the 18 largest U.S. banks could withstand a deep recession and maintain capital above a regulatory minimum, a sign of how higher standards and supervisory prodding are strengthening the financial system.

Only Ally Financial Inc., the auto lender majority-owned by U.S. taxpayers, fell below a 5 percent Tier 1 common ratio, a regulatory minimum and measure of financial strength, according to data released today by the central bank in Washington. Morgan Stanley showed a minimum Tier 1 common ratio of 5.7 percent in the test and Goldman Sachs Group Inc. a ratio of 5.8 percent.

“Even under punitive assumptions you have capital that is above the minimum thresholds of the Fed” for almost all banks, “and that is a good sign for the health of the financial system,” said R. Scott Siefers, a managing director at Sandler O’Neill & Partners in New York. “Even though banks are paying out more of their earnings than a couple of years ago, there has still been an increase in retained earnings,” which bolsters capital.

Since the 2008-2009 financial crisis, U.S. regulators have tried to minimize the odds of another taxpayer rescue, compelling banks to retain some earnings and reinforce their buffers against possible losses. New international and domestic banking rules are also guiding banks toward stronger capitalization.

Housing rebound

With the economy in the fourth year of expansion, banks are also benefiting from a housing-market rebound, falling mortgage delinquencies and record-low short-term interest rates that boost earnings.

Projected losses for the 18 banks under a scenario of deep recession and peak unemployment of 12.1 percent would total $462 billion over nine quarters, the Fed said. The aggregate Tier 1 common capital ratio would fall from an actual 11.1 percent in the third quarter of 2012 to 7.7 percent in the fourth quarter of 2014. The firms represent more than 70 percent of the assets in the U.S. banking system.

The Tier 1 common ratio measures a bank’s core equity, made up of common shares and retained earnings, divided by its total assets adjusted for risk using global banking guidelines.

The ratio grew especially important during the financial crisis as investors applied extreme mark-downs on bank portfolios to see whether firms had enough core equity to absorb additional losses or the potential for balance sheet growth.

‘Fundamentally flawed’

Ally disputed the Fed’s results, calling the analysis “inconsistent with historical experience” and “fundamentally flawed.”

Citigroup Inc., the only U.S. bank among the six biggest to have its capital plan rejected last year, said today that it asked the Fed for permission to repurchase $1.2 billion of shares without seeking a dividend increase.

The bank’s submission “underlines management’s commitment to build and sustain robust levels of capital,” Citigroup said in a presentation on its website. “At the core of Citi’s capital assessment framework is a focus on safety, soundness, credibility and confidence.”

Spokesmen for other banks declined to comment on their firms’ views of the Fed’s estimates or didn’t respond to requests for comment.

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