The Federal Reserve said 15 of the 19 largest U.S. banks could maintain adequate capital levels even in a severe recession scenario that assumes they continue to pay dividends and buy back stock.
Today’s results of the central bank’s stress tests show that nearly three years of economic expansion have helped U.S. banks raise profits, rebuild capital, and increase liquidity after the collapse of Lehman Brothers Holdings Inc. in 2008 nearly toppled the financial system.
“It is night and day,” Jason Goldberg, senior analyst at Barclays Capital Inc. in New York, said before the announcement. “In 2009, about half the banks failed the stress test. The industry’s capital position is higher today, and better quality. There is a lot less leverage.”
JPMorgan Chase & Co. (JPM), in an announcement before the Fed’s release, said it would increase its dividend 20 percent and authorized a $15 billion share repurchase plan after the central bank tested its capital. Stocks rose, sending the Dow Jones Industrial Average to the highest level since 2007, after JPMorgan Chase increased its dividend and the Fed earlier raised its assessment of the economy.
Citigroup Inc., the lender that took the most government aid during the financial crisis, said it will resubmit its capital plan to regulators after failing to meet some minimum standards in the stress tests. SunTrust Banks Inc., Ally Financial Inc. and MetLife Inc. (MET) also fell short by at least one measure under the central bank’s most dire economic scenario. Ally also intends to resubmit its plan, the company said in a statement.
Recession Scenario
The Fed said an unemployment rate of 13 percent, a 50 percent drop in stock prices and a 21 percent decline in house prices under the stress scenario would produce aggregate losses of $534 billion over nine quarters.
Even with that blow, the 19 banks would see their tier one common capital ratio — a measure of bank strength against loss — fall to 6.3 percent in the fourth quarter of 2013 in the hypothetical scenario, above the 5 percent minimum the Fed required. The ratio was 10.1 percent in the third quarter of last year.
The Fed started the test and review of banks’ forward- looking capital strategy in November, saying they should have “credible plans” to meet tougher standards required by new regulations and to continue lending even in period of financial stress.
Loan Portfolios
Of the $534 billion in total projected losses, $341 billion comes from loan-portfolio losses, the Fed said. Loans and trading portfolio and counterparty losses account for 85 percent of the total, the Fed said.
Six banking-holding companies with large trading, private equity and derivatives activities were also subjected to tests of these positions from a “global market shock.” The six were Citigroup, Bank of America Corp. (BAC), Wells Fargo & Co., Morgan Stanley (MS), Goldman Sachs Group Inc. (GS) and JPMorgan Chase.
