20 Mar 2014
Stress test shows continued improvement in US financial sector
FXStreet (Córdoba) - The Federal Reserve release the results of the stress test taken by 30 commercial banks, up from 18 of the previous test. These institutions would lose $500 billion under a severe recession scenario, $355 billion under a less severe situation. Only 1 financial institution, Zions Bancorporation would see its capital level below FED’s requirement of a capital level of 5% (Tier 1 ratio).
More results will be published on Wednesday, in another report that will include which banks failed the test.
Key Quotes:
"The largest banking institutions in the United States are collectively better positioned to continue to lend to households and businesses and to meet their financial commitments in an extremely severe economic downturn than they were five years ago. This result reflects continued broad improvement in their capital positions since the financial crisis.
"Reflecting the severity of the most extreme stress scenario--which features a deep recession with a sharp rise in the unemployment rate, a drop in equity prices of nearly 50 percent, and a decline in house prices to levels last seen in 2001--projected loan losses at the 30 bank holding companies in the latest stress tests would total $366 billion during the nine quarters of the hypothetical stress scenario. The aggregate tier 1 common capital ratio, which compares high-quality capital to risk-weighted assets, would fall from an actual 11.5 percent in the third quarter of 2013 to the minimum level of 7.6 percent in the hypothetical stress scenario. That minimum post-stress number is significantly higher than the 30 firms' actual tier 1 common ratio of 5.5 percent measured in the beginning of 2009."
“This is the fourth round of stress tests led by the Federal Reserve since the tests in 2009 and is the second year that the Federal Reserve has conducted stress tests pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act”.
“In addition to releasing results under the severely adverse hypothetical scenario, the Federal Reserve also on Thursday released results from the adverse scenario, which features a more moderate recession than that seen in the severely adverse scenario, but includes a steep rise in long-term interest rates. In the adverse scenario, the aggregate tier 1 common capital ratio would fall from an actual 11.5 percent in the third quarter of 2013 to the minimum level of 9.7 percent in the hypothetical stress scenario”.
More results will be published on Wednesday, in another report that will include which banks failed the test.
Key Quotes:
"The largest banking institutions in the United States are collectively better positioned to continue to lend to households and businesses and to meet their financial commitments in an extremely severe economic downturn than they were five years ago. This result reflects continued broad improvement in their capital positions since the financial crisis.
"Reflecting the severity of the most extreme stress scenario--which features a deep recession with a sharp rise in the unemployment rate, a drop in equity prices of nearly 50 percent, and a decline in house prices to levels last seen in 2001--projected loan losses at the 30 bank holding companies in the latest stress tests would total $366 billion during the nine quarters of the hypothetical stress scenario. The aggregate tier 1 common capital ratio, which compares high-quality capital to risk-weighted assets, would fall from an actual 11.5 percent in the third quarter of 2013 to the minimum level of 7.6 percent in the hypothetical stress scenario. That minimum post-stress number is significantly higher than the 30 firms' actual tier 1 common ratio of 5.5 percent measured in the beginning of 2009."
“This is the fourth round of stress tests led by the Federal Reserve since the tests in 2009 and is the second year that the Federal Reserve has conducted stress tests pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act”.
“In addition to releasing results under the severely adverse hypothetical scenario, the Federal Reserve also on Thursday released results from the adverse scenario, which features a more moderate recession than that seen in the severely adverse scenario, but includes a steep rise in long-term interest rates. In the adverse scenario, the aggregate tier 1 common capital ratio would fall from an actual 11.5 percent in the third quarter of 2013 to the minimum level of 9.7 percent in the hypothetical stress scenario”.