The nation’s 31 largest banks stand to shed close to half a trillion dollars if the economy slumped into a deep depression, the Federal Reserve said Thursday.<\/p>\n
But the banks \u2014 which include Citigroup, JPMorgan Chase, Wells Fargo and Goldman Sachs \u2014 appear better positioned than ever to handle such loss, Fed data show.<\/p>\n
Indeed, for the first time since the Fed began conducting its “stress tests” on banks with more than $50 billion in assets, not one fell below the Fed’s capital requirements, according to the first phase of the Fed’s stress test results released Thursday.<\/p>\n
That places the nation’s biggest banks in a better position to pass the next phase of the Fed’s stress testing, which will determine which lenders may proceed with plans to return capital to investors. Final grades will be doled out Wednesday.<\/p>\n
The Fed said the nation’s 31 largest banks would lose $490 billion in the 27 months ending October 2016 if the economy was rocked by what it called “severely adverse” conditions.<\/p>\n
Those would include a 10% unemployment rate, a 25% drop in housing prices, a stock market plunge of nearly 60% and “a notable rise in market volatility.”<\/p>\n
But banks have been steadily building their capital reserves to protect against losses due to stiffer requirements from the Fed, which is seeking to avoid further taxpayer funded bailouts like those made during the mortgage meltdown.<\/p>\n
Under the Fed’s worst case scenario, the 31 firms tested would see their common capital ratios, which compare high-quality capital to risky assets, fall from 11.9% in the third quarter of 2014 to 8.2%.<\/p>\n
That compares to aggregate capital ratios of 5.5% in the beginning of 2009, and 7.6% last year.<\/p>\n
“It means our banking sector is pretty healthy right now from the perspective how how much money they are holding,” said Anna Krayn, head of stress testing for Moody’s Analytics. “Some would argue that there’s excess capital in the system,” she said.<\/p>\n
Thursday’s results are just the first phase in the Fed’s stress testing process. On Wednesday, the Fed will announce whether any of the 31 banks still need to rein in capital spending plans.<\/p>\n
Last year, Citigroup, Royal Bank of Scotland Group, HSBC Holdings and Banco Santander passed the Fed’s initial capital hurdle, but still fell short of complete success after the Fed determined that the quality of their processes, including their ability to assess risk, wasn’t good enough.<\/p>\n
Another fail for Citigroup, the largest of the big banks to fail the test twice, will put pressure on CEO Michael Corbat whose success may be measured by Citi’s performance.<\/p>\n
The real question is: are these stress tests and adequate measure of capacity to take a hit.<\/p>\n
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The nation’s 31 largest banks stand to shed close to half a trillion dollars if the economy slumped into a deep depression, the Federal Reserve said Thursday. But the banks \u2014 which include Citigroup, JPMorgan Chase, Wells Fargo and Goldman … Continue reading