Largest US banks all pass latest round of Fed 'stress tests'

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Posted: Mar 05, 2015 6:32 PM
Largest US banks all pass latest round of Fed 'stress tests'

WASHINGTON (AP) — 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 stress tests.

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 banks since 2009. 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 reached 10 percent, home prices sank 25 percent, the stock market plunged nearly 60 percent and market volatility rose sharply. The tests compared the losses projected for each bank with its capital — the cushion it holds against losses.

The Fed said that under that scenario, the 31 banks would suffer combined loan losses of $340 billion. It said such losses would reduce the bank's capital from 11.9 percent of its loans as of the third quarter last year to 8.2 percent at the end of 2016. The 8.2 percent level is far above the 5.5 percent the banks held at the start of 2009, soon 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.

Raising dividends costs money. The government doesn't want banks to shrink their capital reserves, making them vulnerable in another recession.

Frank Keating, CEO of the American Bankers Association, said Thursday's results should allow banks "to pay dividends that help attract investors to fund future growth."

The stress tests aren't without their critics.

"The banks have been working hard to pass the stress tests just like any other examination," said Bert Ely, an independent banking analyst. "That is one of the criticisms of the tests — that they've become too predictable."

Still, Ely noted, "Banks are a reflection of the economy they serve, and the U.S. economy is in pretty good shape."

Since the financial crisis began to fade, industry profits have been steadily rising, and banks have been lending more freely. Last year, Zions Bancorp, based in Salt Lake City, was the only institution to fail the first round of stress tests.

This time, Zions passed with projected capital of 5.1 percent after undergoing the losses projected by a severe downturn — just above the 5 percent minimum level the Fed established.

Last year, the Fed barred Citigroup, the third-largest U.S. bank, from raising its dividend or boosting stock buybacks. The Fed said it was too difficult to assess how portions of Citi's global operation would fare in a sharp downturn. It was a setback for Citigroup, which had been cutting jobs and trimming some businesses to try to bolster its finances.

Citi was the biggest of five banks whose plans the Fed rejected 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 from the other tested banks.

The banks can now amend their plans on dividend payments and stock buybacks to win Fed approval before it announces its decisions on those matters Wednesday.

The banks that the Fed tested this year were:

Ally, American Express, Bank of America, Bank of New York Mellon, BB&T, BBVA Compass, BMO Financial, Capital One, Citigroup, Citizens Financial, Comerica, Deutsche Bank, Discover, Fifth Third, Goldman Sachs, HSBC, Huntington Bancshares, JPMorgan, KeyCorp, M&T, Morgan Stanley, MUFG Americas Holdings, Northern Trust, PNC, Regions Financial, Santander Holdings, State Street, SunTrust, U.S. Bancorp, Wells Fargo and Zions.

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Sweet reported from New York. AP Business Writer Marcy Gordon contributed to this report.