Fed stress tests show biggest banks could survive deep recession

WASHINGTON -- The nation’s largest banks as a group could withstand a severe recession and are much better positioned for blunting economic shocks than before the financial crisis, the Federal Reserve said Thursday in releasing the latest round of stress test results.

Of the 18 banks tested, only Ally Financial Inc. would be at risk of failure under the Fed’s scenario, underscoring the improving financial condition of the banking industry.

Fed officials emphasized that banks could not pass or fail this set of stress tests because they did not take into account some important factors. Next week, the Fed will give what amounts to a pass/fail grade for the banks based on additional information.

At the lowest point in the severe-recession scenario, Ally would fall well below the minimum level using a key Fed measure. That gauge -- the ratio of the bank’s capital to its risk-weighted assets -- would drop to 1.5% for Ally. The minimum level is 5%.

For each of the other large banks, that ratio would stay above 5%. And taken together, the firms -- which account for 70% of all U.S. banking assets -- would be at 7.7% at the end of the nine-quarter deep-recession scenario.

That’s below the banks’ combined 11.1% as of Sept. 30, but well above the approximately 5% level at the end of 2008 in the midst of the financial crisis, Fed officials said.

“The stress tests are a tool to gauge the resiliency of the financial sector,” said Fed Governor Daniel K. Tarullo. “Significant increases in both the quality and quantity of bank capital during the past four years help ensure that banks can continue to lend to consumers and businesses, even in times of economic difficulty.”

Thursday’s results are the first in a two-step process this year that will take into account each bank’s plans to pay dividends and buy back stock -- both of which affect how much capital it has on hand to withstand a future deep economic downturn.

The stress test results will be applied to each bank’s plans. Next week, the Fed will announce which firms can go ahead with those plans and which must raise more capital -- in essence a pass/fail determination similar to the 2009 and 2011 stress tests.

Based on the results released Thursday, the banks could lower their planned dividends and stock repurchases in hopes of getting approval for their plans next week, the Fed said.

The largest banks, including Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., and Wells Fargo & Co., all would be hit hard under a “severely adverse” economic scenario, the Fed said.

Combined, the banks would suffer $462 billion in loan losses during through the end of 2014 in a deep recession that sends unemployment to 12.1%, causes the stock market to lose half its value and knocks housing prices down by more than 20%.

The scenario, including other factors, would be worse than during any two year period since the Great Depression, including during the 2008 financial crisis and the Great Recession.

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