All 33 banks tested would survive a steep downturn while maintaining good health, the Federal Reserve announced Thursday in releasing the results of annual bank stress tests.
The banks, the 33 largest in the U.S., would weather a severe recession with $385 billion in losses over nine quarters. Even with those losses, they maintain a minimum level of equity to be considered healthy under the Fed’s definition.
As a group, the banks’ capital would decline from 12.3 percent of assets, adjusted for the riskiness of the specific assets, to 8.4 percent, well above the 4.5 percent required by regulators under new capital rules.
Since 2009, during the depths of the financial crisis when banks had suffered massive losses on the housing crash, banks have added more than $700 billion in capital, according to the Fed.
Thursday’s stress tests, part of the requirements of the 2010 Dodd-Frank financial reform law, are used by regulators to assess how banks would perform in a downturn. They do not necessarily entail any penalties or regulatory crackdowns for the banks involved.
Next week, the Fed will release results of stress test exercises that include the impact of the banks’ plans for paying out shareholders or buying back shares. If the regulators conclude a bank wouldn’t be adequately capitalized, they could block that firm’s dividend payments. Thursday’s results suggest that the banks will perform well next week.
“Today’s results are an indication of the strength and resiliency of the U.S. financial system,” said Richard Foster, Senior Vice President and Senior Counsel for Regulatory and Legal Affairs at the Financial Services Roundtable, an industry group.
Some banks, however, were not far from some minimum requirements. Columbus-based Huntington Bancshares would see its capital dip to 5 percent against risk-weighted assets, just 0.5 percentage points above the minimum. Morgan Stanley’s capital would drop to 4.9 percent against a different, broader measure for which the minimum is 4 percent.
Last year, Morgan Stanley and three other major banks — Goldman Sachs, JPMorgan Chase, and Bank of America — passed the stress test only after being allowed to revise their capital plans.
Regulators draw up the scenarios in the stress tests to include surprise features to gauge banks’ resiliency in the face of different setbacks. “This feature is key to a sound stress testing regime, since the nature of possible future stress episodes is inherently uncertain” said Governor Daniel Tarullo.
In this year’s version, stock markets would crater by 50 percent by the end of the year, housing prices would decline by a quarter, and corporate bond yields would spike. Unemployment would soar by 5 percentage points, while the European Union, Japan, and the United Kingdom would all suffer recessions. In short, it would be a scenario not far from the actual 2008 crisis.
