A woman walks past a Citibank logo displayed outside the Citibank Plaza in Hong Kong July 28, 2014.Bobby Yip/Reuters
All of the nation's 31 largest banks are adequately fortified to withstand a severe U.S. and global recession and keep lending, the Federal Reserve said Thursday.
Results of the Fed's annual "stress tests" show that as a group, the 31 banks are stronger than at any time since the 2008 financial crisis struck, thanks to a steadily recovering economy. The results build on positive outcomes from last year's tests.
Some industry analysts say the most critical tests for the industry will come next week. That's when the Fed will announce whether it's approved each bank's request, if one has been made, to raise dividends or repurchase shares. Those results will be based on how each bank would fare in a severe recession if it took such steps.
"This week's tests are a more modest standard than what we will get next week," said Cayetano Carrasco-Gea, senior director at Moody's Analytics. "We will see a few banks fail next week."
The banks undergoing the stress tests included JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Wells Fargo and Co. – the four biggest U.S. banks by assets.
The Fed has conducted stress tests of the largest U.S. banks since 2009, when the tests were designed to restore badly shaken confidence in the U.S. financial system. The government had created a $700-billion bailout fund to stabilize hundreds of banks after the financial crisis deepened the worst economic downturn since the 1930s.
Under the stress tests' hypothetical "severely adverse" scenario, the United States would endure a catastrophic recession in which unemployment would reach 10 per cent, home prices would sink 25 per cent, the stock market would drop nearly 60 per cent and market volatility would rise significantly. The tests compares the losses projected for each bank with the capital – the cushion it holds against losses – each holds.
The Fed said that under that scenario, the 31 banks would suffer combined loan losses of $340-billion. It estimated that losses of that magnitude would reduce the 31 bank's capital from 11.9 per cent of its loans as of the third quarter last year to 8.2 per cent at the end of 2016.
The 8.2 per cent level of capital is much higher than the 5.5 per cent that the banks held at the start of 2009, right after the financial crisis hit.
Industry lobbyists applauded the results Thursday and began a public push to get the Fed to approve next week the banks' plans to raise dividends or repurchase shares.
Frank Keating, president and CEO of the American Bankers Association, said in a statement that the results should allow banks "to pay dividends that help attract investors to fund future growth."
Since the financial crisis, industry profits have been steadily rising, and banks have been starting to lend more freely. Last year, Zions Bancorp, a regional institution based in Salt Lake City, was the only institution that failed the Fed's stress test.
This time, Zions passed with projected capital of 5.1 per cent after undergoing the losses projected by a severe downturn – just above the 5 per cent minimum capital level the Fed established as a benchmark.
Last year, the Fed barred Citigroup, the third-largest U.S. bank, from raising its dividend or boosting its stock buybacks. The Fed said it was too difficult to assess how portions of Citi's global operation would fare in a sharp economic downturn. It was a setback for Citigroup, which had been cutting jobs and trimming some businesses in an effort to improve its finances.
Citi was the biggest of five banks whose plans the Fed rejected as part of its stress tests last year. The regulators also said they found deficiencies in the capital plans of HSBC North America Holdings, RBS Citizens Financial Group, Santander Holdings USA and Zions. At the same time, the Fed approved requests outright from the other 25 tested banks, which included Bank of America, JPMorgan Chase, Wells Fargo, Goldman Sachs and Morgan Stanley.
The banks can now amend their plans on dividend payments and stock buy-backs to win Fed approval before the central bank announces its decisions on those matters Wednesday.