Wednesday, 22 November, 2017

Less Stress in Fed's Bank Test

Reuters Reuters
Kelvin Reese | 24 June, 2017, 01:01

All of the 34 largest US banks are fortified enough to withstand a severe USA and global recession and continue lending, the Federal Reserve said Thursday.

The report also endorsed the idea of forcing the Fed to make its stress tests of the largest US banks more transparent.

The stress tests are conducted under the 2010 Dodd-Frank financial reform laws, which Congress enacted in the wake of the 2008 global financial crisis, which President Donald Trump's administration has vowed to scale back. The first phase aims to ensure that each participating bank is sufficiently capitalized to withstand a severely adverse economic scenario, and the US banking sector as a whole has strengthened considerably over recent years thanks to focused efforts by the banks as well as due to an improved operating environment.

Democrats made it clear, however, that they will not support regulatory or legislative changes if they're based on the most controversial recommendations outlined in a report on financial regulation that the Treasury Department released last week.

Four years ago in its annual bank stress test, the Fed predicted that in a severe slowdown Citigroup Inc. would lose almost $55 billion from bad loans.

The table below summarizes the main domestic variables considered by the Federal Reserve for the stress test. They said they could envision smaller banks being exempted from the Volcker Rule, named after former Fed Chairman Paul Volcker who led the central bank in the 1980s.

The Fed said Thursday that under that scenario, the 34 banks would suffer combined loan losses of $383 billion.

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Under the Fed's worst-case stress test scenario, the US unemployment rate more than doubles to 10 percent.

The results come in two phases, and the one directly impacting bank shareholders is due Wednesday.

The FDIC's Gruenberg said both his agency and the Fed should remain involved in reviewing the largest banks so-called living will plans in the event of a collapse.

These tests were implemented in the aftermath of the financial crisis to ensure the banks would be able to survive a similar future crisis and continue to lend even in tough times.

Testings results released Thursday by the Federal Reserve show that the 34 institutions under scrutiny have enough capital to make it through the two scenarios regulators posed - one akin to the financial crisis and another entailing a shallower downturn.

Even more impressive are the banks that were projected by the Fed to earn a profit despite the acute economic scenario. It takes the results from the first round and then factors in requested increases to a bank's dividend and share-repurchase authorization. That is much better than the 4.5 percent threshold that regulators demand, and an improvement on the 8.4 percent common equity tier 1 (CET1) capital ratio assessed a year ago.

Meanwhile, banking giants JP Morgan, Bank of America Wells Fargo, Goldman Sachs and Morgan Stanley showed common equity tier 1 capital ratios between 8.4 and 9.4 per cent.

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