Fed Stress Test Shows 29 of 30 Banks Meet or Top Capital Target

Friday, 21 March 2014 07:08 AM

March 20 (Bloomberg) -- The Federal Reserve said 29 of the 30 largest banks subjected to a stress test have sufficient capital to withstand a deep recession while continuing to pay dividends.

Zions Bancorporation is the only lender that came in below one of the Fed’s main capital thresholds in results released today by the central bank that simulated a deep recession. All 30 banks, including Salt Lake City-based Zions, exceeded the minimum in a separate scenario of rising interest rates, a sign of improved capital levels in the banking system since the 2008 financial crisis.

The largest banks “are collectively better positioned to continue to lend to households and businesses and to meet their financial commitments in an extremely severe economic downturn than they were five years ago,” the Fed said in a statement while releasing data from the test required under the Dodd-Frank Act. “This result reflects continued broad improvement in their capital positions since the financial crisis.”

The Fed runs an annual two-part stress test to ensure banks have enough capital and cash to withstand shocks that may threaten their survival. The goal is to head off a recurrence of taxpayer-funded bailouts as in 2008, when government rescues averted the collapse of some of the world’s largest lenders. Firms that fail a second round of tests released next week may have to forgo stock buybacks and higher dividends.

‘Most Important’

“The annual stress test is one of the Federal Reserve’s most important tools to gauge the resiliency of the financial sector and to help ensure that the largest firms have strong capital positions,” Daniel Tarullo, the Fed governor in charge of bank supervision and regulation, said in an e-mail statement.

Total projected loan losses for all 30 banks differed widely between the two scenarios. Under the adverse scenario of rising rates, banks lose $267 billion on all loans, including credit cards, commercial real estate, and mortgages. Under the severely adverse conditions, loan losses total almost $100 billion more, or $366 billion.

Fed supervisors this year scrutinized risks from litigation, counterparty failure, and high-yield loans as they guide banks toward higher capital buffers against financial and economic shocks.

In the Fed’s severely adverse scenario, Zions Bancorporation fell below a 5 percent ratio for Tier-1 common equity to total assets weighted for risk, according to data released by the central bank. Banks under this test face a deep recession, with U.S. gross domestic product collapsing at a 6.1 percent annual rate in the first quarter of 2014 and real disposable income falling at a 2.4 percent pace.

Weighted Assets

The ratio of Tier-1 common equity to assets weighted for risk at all bank holding companies has averaged about 13 percent over the past two years, four percentage points higher than the average prior to 2009, the Fed said last month. Regulators use the ratio, which compares a firm’s common equity capital to its risk-weighted assets, to measure a bank’s cushion against losses.

“Banks are still hoarding a lot of capital -- in other words they’re generating quite a bit internally and they’re not paying it out,” R. Scott Siefers, a managing director at Sandler O’Neill + Partners LP in New York, said before the results were released. “Capital levels by and large are very, very strong.”

Banks can’t pass or fail the test released today, which doesn’t take into account management actions to preserve capital. In the tests released March 26, regulators will try to ensure those actions, such as dividend cuts, keep banks above a minimum Tier-1 common ratio of 5 percent over nine quarters in harsh economic scenarios.

To contact the reporters on this story: Craig Torres in Evil at ctorres3@bloomberg.net; Michelle Jamrisko in Washington at mjamrisko@bloomberg.net To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net James L Tyson

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Fed Stress Test Shows 29 of 30 Banks Meet or Top Capital Target
Friday, 21 March 2014 07:08 AM
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