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Federal Reserve Says Most Major U.S. Banks Would Survive Severe Recession
Originally published on Tue March 13, 2012 2:46 pm
Update at 4:34 p.m. ET. 15 of 19 Banks Pass Stress Test:
The Federal Reserve says 15 of the country's top 19 banks have enough capital to survive a "severe recession," which it defined as "peak unemployment rate of 13 percent, a 50 percent drop in equity prices, and a 21 percent decline in housing prices."
"The regulator said Citigroup, Ally Financial and SunTrust banks fared worst under the supervisory stress ratios, with Tier 1 common capital ratios of 4.9 percent, 4.4 percent, and 4.8 percent, respectively.
"The bank holding companies that came out top were Bank of New York Mellon with a Tier 1 common capital ratio of 13.1 percent under the hypothetical financial shock, State Street Corp with 12.5 percent and American Express with 10.8 percent. Bank of America came in with 6.2 percent, and JPMorgan's result was 5.9 percent."
The full report is here.
Update at 4:46 p.m. ET. Citigroup, SunTrust Banks Fail:
Citigroup, the country's third-largest bank "failed to meet the Federal Reserve's minimum requirements in a stress test when examiners considered the effects of the bank's plan for managing capital," reports Bloomberg.
Sun Trust Bank and Ally Bank also failed to meet minimum requirements.
Here's the important table from the report. The first column is the stressed ratios without any of the hypothetical "capital actions." The second column shows the ratios after those actions are taken into account:
Bloomberg reports the Fed wanted a minimum 5.0 percent Tier 1 common capital ratio to pass the test. (Note that the Fed is also looking at three other measures, which if you click on that report link are shown on page 24.)
Update at 5:44 p.m. ET. Big Change Since 2009:
Bloomberg says the latest tests show that banks are in much better shape than they were leading up to financial crisis. They spoke to one analyst who said:
"'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.'"
Our Original Post Continues:
With the results of stress tests of major banks already leaked, the Federal Reserve said it would release full results a bit after the markets close today. The Fed had originally said it would release them Thursday.
Using what Bloomberg calls expanded supervisory powers, the Federal Reserve put nation's 19 largest banks through what it called a "Comprehensive Capital Analysis and Review." Essentially, the Fed is trying to see if the banks have enough capital to survive a "severe recession," which they defined as "peak unemployment rate of 13 percent, a 50 percent drop in equity prices, and a 21 percent decline in housing prices."
So what do we know so far?
-- Forbes reports that JPMorgan Chase passed the stress test and "will up its quarterly dividend to 30 cents per share, from 25 cents. The bank's board also authorized a new $15 billion stock repurchase program, $12 billion of which is approved for 2012 with the remainder available for the first quarter of 2013."
-- The Wall Street Journal reports Bank of America also passed its stress test.
-- The news — along with the Fed's earlier statement the economy would continue moderately improving in the coming quarters — sent the markets sharply higher today. Here's the AP with preliminary numbers:
"Preliminary results show the Dow Jones industrial average closing up 220 points at 13,179. That's the highest close since the last day of 2007. The Nasdaq composite index is closing above 3,000 for the first time since December 2000."