“The nation’s largest bank holding companies continue to build their capital levels and improve their credit quality, strengthening their ability to lend to households and businesses”, the central bank said in a statement.
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Many analysts believe that this was the easy phase of the stress test. A key capital ratio measuring Tier 1 common equity as a portion of risk-weighted assets would drop to a low of 8.4 per cent, in aggregate – well above the minimum set by regulators. Goldman Sachs’ capital ratio would fall from 13.6 per cent to 8.4 per cent, Morgan Stanley’s ratio would fall almost in half, from 16.4 per cent to 9.1 per cent. While the Fed didn’t specifically analyze how banks would fare if Britain left the European Union, all 33 banks tested had enough capital to withstand a deep economic meltdown, according to results released Thursday.
Thursdays’ stress test is one of two annual evaluations by the Fed.
Each of the 33 banks that were tested under the severely adverse scenario that assumed a decline of about 50% in equity prices, unemployment rate at a peak of 10% and a sharp fall in gross domestic product were able to stay above minimum required capital levels.
“The Federal Reserve is prepared to provide dollar liquidity through its existing swap lines with central banks, as necessary, to address pressures in global funding markets, which could have adverse implications for the U.S. economy”, the central bank said in a statement. Wells Fargo & Co., for example, estimated it would lose $3 billion on loans for U.S. commercial real estate, a market regulators have been scrutinising, under one scenario while Fed examiners estimated $10 billion. Next week, the Federal Reserve will evaluate the Comprehensive Capital Analysis & Review (CCAR), which will show how much the bank can pay out in dividends and buy back shares. In last year’s DFAST scores, Citigroup looked like it was at risk of failing when one measure of its capital came up barely above that minimum.
If financial conditions tighten, “the added uncertainty is just not good for short-term spending, hiring and investment decisions”, said Joe LaVorgna, chief USA economist at Deutsche Bank Securities Inc.in NY. Many banks typically release their own results later on Thursday. Next week, the banks will be tested using the initial results along with the actual capital distributions, which will provide the regulators with a complete picture of the banks’ capital strength and plans. In 2014, it was forced to resubmit its capital plan after belatedly discovering that it had mismarked securities inherited in its 2008 acquisition of Merrill Lynch.
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It’s not clear exactly what might be in Bank of America’s and Wells Fargo’s latest capital-return plans. Chief Executive Officer Brian Moynihan responded by allocating more than $100 million to overhaul controls and he promoted veteran human-resources executive Andrea Smith to chief administrative officer, overseeing the stress-test submission.
