March 14, 2012
The Federal Reserve said 15 of the 19 largest U.S. banks pass stress tests, or Comprehensive Capital and Analysis Review (CCAR), as they could maintain adequate capital levels even in a recession scenario in which they continue paying dividends and buy back stock. Four banks, including Citigroup, have more work to do and need more capital.
The stress tests results show that nearly three years of economic expansion have helped U.S. banks raise profits, rebuild capital, and increase liquidity after the collapse of Lehman Brothers Holdings Inc. in 2008 nearly toppled the financial system.
The Fed said an unemployment rate of 13 percent, a 50 percent drop in stock prices and a 21 percent decline in prices under the stress scenario would produce aggregate losses of $534 billion over nine quarters. Even with that blow, the 19 banks would see their tier one common capital ratio -- a measure of bank strength against loss -- fall to 6.3 percent in the fourth quarter of 2013 in the hypothetical scenario, above the 5 percent minimum the Fed required. The ratio was 10.1 percent in the third quarter of last year.
The Fed said the stress test was modeled on an extreme negative scenario and not its actual outlook for the economy. It was the first time the Fed had released a thorough test of the banks' financial health since the early days of the financial crisis. The Fed has conducted the stress tests each year since 2009. The Fed did not publicize the results of its tests in 2010 or 2011. After the first round of tests, in 2009, the Fed ordered 10 banks to raise a total of $75 billion. Bank of America Corp. alone was told to raise $34 billion.
Three banks - Ally Financial, Citigroup and SunTrust - would likely need new capital from either investors or the government in the Fed's adverse economic scenario.
A fourth financial firm, insurer Metlife, would likely be in need of assistance as well. A senior official at the Fed said all four of the banks would need to submit plans that would detail how they would increase their capital to make them less vulnerable in a downturn.
The Fed released the results two days earlier than planned after JPMorgan Chase sent out a press release late Tuesday saying it had passed the test. That prompted the Fed to move up the stress test announcement to after the closing bell Tuesday.
Bank stocks surged Tuesday before the Federal Reserve officially announced stress tests results. JPMorgan Chase sparked the rally by jumping the gun since the results of the Fed's stress tests were not due to be released until Thursday. JPMorgan Chase announced Tuesday it was raising its dividend and launching a new $15 billion stock repurchase plan and pointed out that the Fed had already completed the CCAR and "did not object" to the bank's plan.
The Fed didn’t order any of the banks that failed its test to raise specific sums. However, it won’t allow them to increase dividends or buy back shares, and it told them to submit plans within 30 days outlining how they plan to get stronger.
The banks that passed the stress tests celebrated with announcements of increased dividends and plans to buy back their own shares