Federal Reserve: US Banks Passed Stress Test

Reuters

Of the 34 banks that were required to undergo the most recent stress tests, Ally Financial Inc (ALLY.N) and KeyCorp (KEY.N) were the only two lenders to show common equity Tier 1 capital ratios below 7 percent.

Even after being pounded by a severe economic downturn, banks collectively had a 9.2% capital buffer, staying well above the Fed's minimum of 4.5%.

Overall, officials found that in the most severe scenario, companies would have suffered about US$383 billion in losses on loans.

The Fed introduced stress tests after the 2008 financial crisis rocked markets around the globe in order to examine whether the country's biggest banks could handle a severe recession.

The biggest United States banks' own estimates for loan losses were more optimistic than the Fed's - a trend that has arisen in past years as well.

"This year's results show that, even during a severe recession, our large banks would remain well capitalized", said Fed Governor Jerome Powell, who leads banking regulation for the central bank.




"Today's results reaffirm that USA banks are strong and remain well positioned to continue playing their important role in accelerating economic growth", the group said. Those banks represent about 75 percent of all USA assets. The regulators said that, although there have been improvements, the banks continue to show weaknesses in supervision that could harm their capital planning.

The report, which was released by the Treasury Department, recommended giving the president the power to fire the head of the Consumer Financial Protection Bureau, giving Treasury greater power to oversee bank regulators, requiring regulatory agencies to analyze the cost of new rules and stripping the Federal Deposit Insurance Corp. of its responsibility to oversee banks' plans for how they should be unwound if they fail.

Banks that decide to resubmit their plans can only make downward revisions to the amount of capital they plan to use, meaning management teams that were too conservative may regret their submissions even if they pass.

In last year's second round, the Fed barred US businesses of two European banks, Germany's Deutsche Bank and Spain's Santander, from raising dividends or boosting stock buybacks.

The central bank should consider adjusting regulations "in common-sense ways that will simplify rules and reduce unnecessary regulatory burden without compromising safety and soundness", Powell said in prepared remarks released on Wednesday.

"If the Fed bets wrong and treats one particular trading strategy as low risk and it's high risk, all the banks will have taken that low-risk bet and it will have turned out very badly", she said. Wells Fargo's metric also fared better in its own test than under the Fed's, by 0.8 of a point.

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