The Federal Reserve said on Thursday all 31 banks it tested as part of its Dodd-Frank Act Stress Test held minimum capital levels to withstand another financial downturn. No banks failed the Fed's so-called stress tests, however, America's largest lenders still need to hear whether their capital plans, which govern dividend and share buyback activity, will be approved by the regulator.
Under a "severely adverse" economic scenario, the Federal Reserve said that U.S. banking giants such as
Bank of America passed with a minimum tier 1 ratio of 7.1%, while Wells Fargo passed with a 6.9% ratio and Citigroup passed with a 6.8% ratio. The minimum CET1 ratio's of Morgan Stanley and JPMorgan came in at 6.3%, while Goldman Sachs was seen by the Fed as one of the least capitalized banks at ratio of 5.8%.
Banks like Ally Financial and Zions Bancorporation passed this year's stress tests after failing in recent years, indicating continued balance sheet recovery across the U.S. banking industry since the financial crisis. "The largest U.S.-based bank holding companies continue to build their capital levels and to strengthen their ability to lend to households and businesses during a period marked by severe recession and financial market volatility" the Fed said on Thursday.
The stress tests and the Fed's tight watch of capital returns to shareholders have also played a part. On March 11, U.S. banks subject to stress testing will find out if their capital plans will be approved.
Presently, Citigroup is the Wall Street mega-bank with the most on the line. In recent years, the lender has seen its planned dividend and buyback activity rejected by the Fed, first causing the ouster of former CEO Vikram Pandit and creating unforeseen headwinds for his replacement, Michael Corbat.
The Federal Reserve tests bank holding companies with $50 billion or more of total assets against a baseline scenario that includes 28 variables, ranging from unemployment to exchange rates and income levels. Over the nine quarters of the stress test planning horizon, losses at the 31 banks under the severely adverse scenario are projected to be $490 billion, the Fed said on Thursday.
The adverse scenario in this year's tests is different from 2014 -- the main difference is that the Fed now projects a pick-up in U.S. inflation, leading to a flatter yield curve. Previously, the Fed had tested for a share rise in long-term interest rates not accompanies by a similar rise in short-term rates.
Stress testing of bank leverage ratios, another key element of the Fed's examinations, will be phased in over time. On that front, U.S. banking giants, and particularly investment banks, have continued balance sheet work to do. Morgan Stanley's minimum stressed leverage ratio came in at 4.5%, while JPMorgan and Citigroup were 4.6%.
