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Stress Test: Banks Get Clean Bill Of Health

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The Federal Reserve has determined that the largest U.S. banks are strongly capitalized and would be able to lend to banks as well as households during a severe global economic recession. This is the fourth straight year that all banks have met the Federal Reserve's standards.

The first round of results of the supervisory stress tests were released by the central bank on Thursday. The largest U.S. banks showed they had adequate capital levels to withstand the harshest scenario.

According to the Fed, the "severely adverse" scenario is the most stringent scenario yet used in the Board's stress tests. It features a severe global recession with the U.S. unemployment rate rising to 10 percent, accompanied by a steepening Treasury yield curve.

The 35 largest bank holding companies that were tested by the Federal Reserve this year represent about 80 percent of the assets of all banks operating in the U.S.

Under the most severe hypothetical scenario, the 35 banks were projected to record $578 billion in total losses during the nine quarters tested. This compares to projected losses of $383 billion for the 34 banks tested last year.

The banks' aggregate common equity tier 1 capital ratio would fall to a minimum level of 7.9 percent in the scenario period from an actual level of 12.3 percent in the fourth quarter of 2017. Since 2005, the 35 banks have added about $800 billion in common equity capital.

The Fed noted that several factors, including generally higher credit card balances and recent charges to the tax code, affected the post-stress capital ratios this year.

The Fed also said that bank holding companies with less than $100 billion in total consolidated assets will be exempted from the stress tests. As a result, CIT Group Inc., Comerica Inc. and Zions Bancorp will not be included by the Fed in this year's results and future cycles.

The Dodd-Frank Act stress tests are only a component of the Federal Reserve's analysis during the Comprehensive Capital Analysis and Review or CCAR. The Fed will release the CCAR results on Thursday, June 28.

by RTTNews Staff Writer

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