U.S. banks have enough capital to withstand a severe economic downturn, the Federal Reserve Board said on Thursday, with all but one major bank passing the regulator's annual health check.
All 18 participating lenders except for Ally Financial – government-owned after being rescued during the financial crisis – met the minimum capital hurdle of a 5 per cent capital buffer, in the Fed's "stress test."
"The nation's largest bank holding companies ... are collectively in a much stronger capital position than before the financial crisis," the Fed said in a statement.
The 18 banks' aggregate so-called Tier 1 common capital gauge would hit a low of 7.4 per cent under the hypothetical stress scenario. That was much better than an actual 5.6 per cent at the end of 2008, the Fed said.
The stress scenario included a peak unemployment rate of 12.1 per cent, a drop in equity prices of more than 50 per cent, a decline in housing prices of more than 20 per cent and a sharp market shock for the largest trading firms.
"Projected losses at the 18 bank holding companies would total $462-billion [U.S.] during the nine quarters of the hypothetical stress scenario," the Fed said in its release.
Two Wall Street banks, Morgan Stanley at 5.7 per cent and Goldman Sachs at 5.8 per cent, showed the two lowest outcomes above the 5 per cent threshold. They were followed by JPMorgan at 6.3 per cent.
At 1.5 per cent, Ally Financial was the only bank missing the 5 per cent target. Formerly known as GMAC, Ally is 74 per cent-owned by the U.S. Treasury after a series of bailouts during the financial crisis.
The Fed's annual stress tests were mandated by the 2010 Dodd-Frank financial reform law, and are partly meant to determine whether banks can start returning money to shareholders in the form of dividends or share buybacks.
Unlike last year, this first batch of results does not look at the impact of any such payouts. The Fed's 2012 rejection of a dividend boost by Citigroup sent its shares tumbling.
To avoid a similar debacle, the Fed is giving banks 48 hours to tweak any capital plans they may have.
Next week, the Fed will publish the second phase of stress test results, this time with the proposed capital action.