NEW YORK, March 8 — The biggest US banks have enough capital to withstand a severe economic downturn, the Federal Reserve said yesterday, with all but one passing the annual health check of the financial sector.
Banks’ efforts to boost their capital since the 2007-2009 US financial crisis helped all 18 participating lenders except Ally Financial meet the minimum hurdle of a 5 per cent capital buffer in the Fed’s “stress test.”
The tests give regulators a view into how the banking sector would respond to a severe recession. The firms in the test represent more than 70 per cent of total bank holding company assets in the United States, a senior Fed official said.
“The nation’s largest bank holding companies ... are collectively in a much stronger capital position than before the financial crisis,” the Fed said in a statement.
Of the four largest US banks, Bank of America, Wells Fargo and Citigroup saw improvements in their minimum Tier 1 common capital ratios, compared to last year’s similar test. JPMorgan Chase held steady at 6.3 per cent.
Citigroup had the highest ratio of the top four at 8.3 per cent.
Two Wall Street banks, Morgan Stanley at 5.7 per cent and Goldman Sachs at 5.8 per cent, showed the two lowest outcomes above the 5 per cent threshold.
The two saw big losses related to trading positions and counterparty credit. The Fed only analyzed that specific risk for the six banks with large trading operations.
Stress testing has become a central part of US regulators’ efforts to shore up the financial sector after the crisis. The 2010 Dodd-Frank financial oversight law called for the tests to ensure banks have big enough capital cushions to survive a severe recession or other market jolt.
Regulators also will use the tests to determine whether banks can start returning money to shareholders in the form of dividends or share buybacks.
Unlike last year, the Fed did not announce those results right away. The regulator’s 2012 rejection of a dividend boost by Citigroup sent its shares tumbling.
To avoid a similar debacle, the Fed is giving banks 48 hours to tweak any capital plans they may have, before releasing decisions on those plans on March 14.
But some bankers are worried that their stocks could still face volatile swings as analysts and investors try to guess how much capital banks will be able to return to shareholders over the next year.
Citigroup said yesterday it was not seeking an increase in its current quarterly dividend of one cent per share. It did ask to conduct a US$1.2 billion (RM3.7 billion) common stock buyback program through March of 2014.
Other banks did not immediately announce their capital plans. The Fed gave the banks more information about the stress tests than was released publicly, but analysts said they did not expect banks to be surprised by the Fed’s responses to their capital proposals.
“Everybody will be conservative all around. And so I think there will not be problems with the proposed plans,” said H. Walter Young, director of Deloitte’s regulatory practice.
Under the Fed’s toughest stress scenario, which yielded the results disclosed yesterday, unemployment would spike to 12.1 per cent, equity prices would fall more than 50 per cent, housing prices would dip more than 20 per cent, and the largest trading firms would experience a sharp market shock.
The results showed that the 18 banks’ aggregate capital gauge would hit a low of 7.4 per cent under the hypothetical stress scenario. That was much better than an actual 5.6 per cent at the end of 2008, the Fed said.
“The industry has clearly recovered,” said Nancy Bush, a veteran bank analyst and contributing editor with SNL Financial. “But I don’t think anybody is going to do anything heroic in terms of rewarding shareholders over the next couple of years, and I think we need to get ready for that reality.”
At 1.5 per cent, Ally Financial was the only bank to miss the 5 per cent target. The Fed’s results included the assumption that Ally still bears liabilities from its mortgage unit, which filed for bankruptcy in May.
The US government owns a majority stake in Ally, the former General Motors lending arm, after a series of government bailouts.
Firms that come in below the 5 per cent minimum are not necessarily in danger of collapsing but must work with the Fed on a plan to bring capital back up to the standard, senior Fed officials said.
Ally said in a statement that the Fed’s analysis was “inconsistent with historical experience in the most stressed periods in our business.”
Banks have a chance this year to respond to the Fed’s analysis by releasing the results of their own tests, calculated using the same scenarios the regulator used.
The banks have until the end of the month to disclose these results, but some put out their own findings yesterday. For the most part, banks’ own results yielded higher marks than the Fed’s did.
Bank of America said its Tier 1 common capital ratio would drop as low as 7.7 per cent under the scenario, compared to the Fed’s estimate of 6.8 per cent.
Morgan Stanley pegged its minimum Tier 1 common ratio at 6.7 per cent, compared with 5.7 per cent projected by the regulator. And JPMorgan saw a minimum of 7.6 per cent versus the Fed’s 6.3 per cent.
Some of the banks also projected lower losses and higher revenues during the stress period. Wells Fargo estimated a total loss before taxes of US$1.7 billion over the nine-quarter period, compared to the Fed’s projected loss of US$25.7 billion.
PNC Financial Services Group, in contrast to the others, found that its minimum Tier 1 common capital ratio would be lower than the Fed’s projection and that its cumulative losses would be higher than the regulator’s numbers.
Aggregate losses at the 18 companies were projected at US$462 billion during the nine quarters under the scenario, down from US$534 billion in losses at 19 companies last year.
A senior Fed official attributed the loss decline to continued writedowns of bad assets, improved underwriting for new loans and improved financial health of borrowers.
Bank of America, Citigroup, Wells Fargo and JPMorgan Chase had the biggest exposure to potential loan losses, due to their size and scale. Those four firms accounted for 69 per cent of the Fed’s estimated US$316.6 billion in loan losses for the 18 largest US banks.
Capital One Financial Corp had the weakest-quality overall loan book, with a 13.2 per cent overall loss rate. That was attributable to high loss rates on junior liens and home-equity loans, as well as credit cards. — Reuters