Good news for the financial sector: For the first time since the Federal Reserve began mandatory stress tests for the nation’s largest financial institutions in 2009, all 31 banks passed this year’s assessments, holding a sufficient capital buffer to weather a variety of hypothetical economic downturn scenarios.
The results, released by the Federal Reserve on Wednesday afternoon, show that U.S.-based bank holding companies “continue to build their capital levels and to strengthen their ability to lend to households and businesses during a period marked by severe recession and financial market volatility.” This is the fifth round of stress tests led by the Federal Reserve since 2009 and the third since the Dodd-Frank Act required stress tests for bank holding companies with $50 billion or more in total consolidated assets and all nonbank financial companies designated by the Financial Stability Oversight Council as systematically important.
The most severe hypothetical scenario projected that loan losses at the 31 banks would total $340 billion during the nine quarters tested. The "severely adverse" scenario featured a deep recession with the unemployment rate peaking at 10 percent, a decline in home prices of 25 percent, a stock market drop of nearly 60 percent, and a notable rise in market volatility. The 31 firms' aggregate tier 1 common capital ratio, which compares high-quality capital to risk-weighted assets, would fall from an actual 11.9 percent in the third quarter of 2014 to a minimum level of 8.2 percent in the hypothetical stress scenario. This test’s post-stress minimum is significantly higher than the 31 firms' aggregate tier 1 common capital ratio of 5.5 percent measured in the beginning of 2009.
The quantitative results from the Dodd-Frank stress tests are one component of the Federal Reserve's analysis during the Comprehensive Capital Analysis and Review. The next batch of CCAR results arrives on March 11. With those results, banks will learn whether the Federal Reserve objects to proceeding with dividend payments, rather than continuing to bolster capital reserves. If it the Fed objects to a capital plan, the bank may only make capital distributions with written approval and must resubmit its capital plan following “a substantial remediation of the issues that led to the objections.”
Last year, based on “qualitative concerns,” the Federal Reserve objected to the capital plans of Citigroup, HSBC North America Holdings, RBS Citizens Financial Group, Santander, and Zions.