Wells Fargo and JPMorgan Chase Co. joined banks raising dividends and authorizing share repurchases after passing the stress tests. Photo: Victor J. Blue/Bloomberg
March 14 (Bloomberg) — Wilbur Ross, the billionaire chairman of private-equity firm WL Ross Co., talks about results of Federal Reserve stress tests for banks and today’s New York Times opinion piece by an outgoing Goldman Sachs Group executive.
Ross speaks with Betty Liu on Bloomberg Television’s “In the Loop.” (Source: Bloomberg)
March 14 (Bloomberg) — Bloomberg’s Julie Hyman reports on the Federal Reserve’s 2012 bank stress test. She speaks on Bloomberg Television’s “Inside Track.” (Source: Bloomberg)
March 14 (Bloomberg) — Mohamed El-Erian, chief executive officer and co-chief investment officer at Pacific Investment Management Co., talks about the results of the Federal Reserve’s bank stress tests and the U.S. economy.
El-Erian speaks with Betty Liu and Michael McKee on Bloomberg Television’s “In the Loop.” (This is an excerpt of the full interview. Source: Bloomberg)
March 14 (Bloomberg) — Richard Bove, an analyst at Rochdale Securities LLC, talks about the results of Federal Reserve bank stress tests and a New York Times opinion piece by a departing Goldman Sachs Group Inc. employee.
Bove speaks on Bloomberg Television’s “InBusiness With Margaret Brennan.” (Source: Bloomberg)
March 14 (Bloomberg) — JPMorgan Chase Co., the biggest U.S. bank, surprised investors and the Federal Reserve when the firm announced two days early that it had received regulatory approval for a 20 percent dividend increase.
Dawn Kopecki reports on Bloomberg Television’s “InsideTrack.” (Source: Bloomberg)
March 14 (Bloomberg) — Michael Dueker, a former St. Louis Federal Reserve economist, now the chief economist for Russell Investments North America, talks about the U.S. economy, Fed monetary policy and stress tests of U.S. banks.
He speaks from Seattle with Susan Li on Bloomberg Television’s “First Up.” (Source: Bloomberg)
March 13 (Bloomberg) — The Federal Reserve said 15 of the 19 largest U.S. banks could maintain adequate capital levels even in a recession scenario in which they continue paying
dividends and buy back stock.
Citigroup Inc., SunTrust Banks Inc., MetLife Inc. and Ally Financial Inc. failed to meet the Fed’s minimum requirements. Betty Liu, Julie Hyman, Michael McKee, Adam Johnson and Stephanie Ruhle, report on Bloomberg Television’s “Street Smart.” (Source: Bloomberg)
March 14 (Bloomberg) — The resilience of the largest U.S. financial firms when tested against a recession more severe than the last one shows regulators have succeeded in pushing banks to build fortress-like balance sheets. Bloomberg’s Mike McKee reports on Bloomberg Television’s “Inside Track.” (Source: Bloomberg)
March 14 (Bloomberg) — Thomas Brown, chief executive officer at Second Curve Capital LLC and a Bloomberg contributing editor, talks about the results of the Federal Reserve’s bank stress tests.
Brown speaks with Betty Liu on Bloomberg Television’s “In the Loop.” Mohamed El-Erian, chief executive officer and co-chief investment officer at Pacific Investment Management Co., also speaks. (Source: Bloomberg)
Enlarge image
JPMorgan Chase
Mario Tama/Getty Images
The JP Morgan Chase offices in New York City.
The JP Morgan Chase offices in New York City. Photographer: Mario Tama/Getty Images
Enlarge image
Stress Tests Show How Fed Pushed Banks to Bolster Balance
Robert Caplin/Bloomberg
Chase Bank in New York.
Chase Bank in New York. Photographer: Robert Caplin/Bloomberg
The resilience of the largest U.S.
financial firms when tested against a recession more severe than
the last one shows regulators have succeeded in pushing banks to
build fortress-like balance sheets.
The Fed yesterday said 15 of 19 banks would be able to
maintain capital levels above a regulatory minimum in an
“extremely adverse” economic scenario, even while continuing
to pay dividends and repurchasing stock. Those results were due
to scrutiny by the Fed on capital payouts over the past three
years, the central bank said.
Regulators, empowered by the Dodd-Frank Act and goaded by
criticism for failing to spot the subprime mortgage debacle,
have redesigned their approach to bank supervision. They now
place greater emphasis on systemic risk as they seek to avoid a
repeat of the crisis that resulted in a $245 billion taxpayer
bailout of banks through the Troubled Asset Relief Program.
“Any bank that remains adequately capitalized under these
acute stress scenarios is not just strong but also darn-near
impregnable,” said Karen Shaw Petrou, a managing partner at
Federal Financial Analytics, a Washington research firm, whose
clients have included Wells Fargo Co. (WFC) “What’s a bank for is
at the heart of this question: Is it to be Fort Knox?”
JPMorgan Chase Co. (JPM) and Wells Fargo joined banks raising
dividends and authorizing share repurchases after passing the
stress tests. Citigroup Inc. (C), the lender that took the most
government aid during the financial crisis, said it will
resubmit its capital plan to regulators after failing to meet
some minimum standards in the tests. Citigroup has repaid $45
billion in TARP money.
Falling Short
SunTrust Banks Inc., Ally Financial Inc. and MetLife Inc. (MET)
also fell short by at least one measure under the central bank’s
worst-case scenario. Ally also intends to resubmit its plan, the
company said in a statement.
U.S. stocks rose for a sixth day today, pushing the
Standard Poor’s 500 index up 0.14 percent to 1,397.82 at 10:05
a.m. in New York. The yield on the benchmark 10-year Treasury
note rose to 2.23 percent from 2.13 percent late yesterday.
The KBW Bank Index (BKX), which tracks shares of 24 of the
largest U.S. banks, rose 4.6 percent yesterday. The index is up
21 percent this year on expectations of stronger economic growth
and improving profits. Concern that the nation’s banks may be
damaged by Europe’s debt crisis helped drive down the index 25
percent in 2011, its worst annual performance since 2008.
Adequate Capital
The Fed tested the banks to ensure that they have adequate
capital to continue lending in a downturn. The test assumed an
unemployment rate of 13 percent — compared with a peak of 10
percent as a result of the 18-month recession that ended in June
2009 — a 50 percent drop in stock prices and a 21 percent
decline in house prices. It showed that those circumstances
would produce aggregate losses of $534 billion over nine
quarters.
Even with such a blow, the 19 banks would see their Tier 1
common capital ratio — a measure of bank strength against loss
– fall to 6.3 percent in the fourth quarter of 2013, above the
5 percent minimum the Fed required. The ratio was 10.1 percent
in the third quarter of last year.
‘Very Onerous’
The fact that most of the banks came through “this very
onerous stress test” demonstrates “the strength of the U.S.
banking system,” Gerard Cassidy, an analyst with RBC Capital
Markets, said in an interview.
European banks’ reluctance to lend to one another fell
yesterday to the lowest in seven months. The Euribor-OIS spread,
the difference between the euro interbank offered rate and
overnight indexed swaps, declined to its lowest since Aug. 5.
Banks are “much better capitalized” than during the 2008
financial crisis and “understand their balance sheet and loan
portfolio much better,” said Paul Miller, a former examiner for
the Federal Reserve Bank of Philadelphia and analyst for FBR
Capital Markets in Arlington, Virginia.
Bankers criticized the criteria the Fed used in the stress
tests.
Frank Keating, president and chief executive officer of the
American Bankers Association, said he objects “to testing bank
capital under theoretical conditions that are far more severe
than even those seen during ‘the Great Recession.’”
Ally Financial said in a statement that the central bank’s
“analysis dramatically overstates potential contingent mortgage
risk, especially with respect to newer vintages of loans.”
Tougher Standards
The Fed started the test and review of banks’ forward-
looking capital strategy in November, saying they should have
“credible plans” to meet tougher standards required by new
regulations.
Banks “have sufficient capital to weather a severe
storm,” said Ernest Patrikis, a partner at White Case LLP and
former general counsel at the Federal Reserve Bank of New York.
“One question is whether they will have too much capital.”
Bank of America CEO Brian Moynihan and other executives
have complained that carrying too much capital could restrict
lending.
Of the $534 billion in total projected losses, $341 billion
comes from loan-portfolio losses, the Fed said. Loans and
trading portfolio and counterparty losses account for 85 percent
of the total, the Fed said.
Six bank-holding companies with large trading, private
equity and derivatives activities were also subjected to tests
of these positions from a “global market shock.” The six were
Citigroup, Bank of America Corp. (BAC), Wells Fargo, Morgan Stanley (MS),
Goldman Sachs Group Inc. (GS) and JPMorgan Chase.
Better Positioned
“Some banks are better positioned than others, and you’re
going to see them start to steal some market share and sort of
separate themselves,” said William Fitzpatrick, a Milwaukee-
based financial-services analyst at Manulife Asset Management,
whose team oversees $800 million and invests in companies such
as Citigroup, JPMorgan Chase and MetLife. “We’re going to see
some separation between the winners and the ones that didn’t
pass.”
The stress tests are now a standard feature of the Fed’s
big-bank supervision and oversight of financial risk. The
concept was born in late 2008 when Chairman Ben S. Bernanke was
trying to discern the maximum losses facing the banking system
following the collapse of Lehman Brothers Holdings Inc.
Focus on 19
The Fed’s focus on the l9 largest institutions’ capital
management also reflects a wary attitude toward boards that paid
out more than $43 billion in dividends as housing markets
started to deteriorate in 2007, according to comments last year
by Patrick Parkinson, the former director of the Fed’s Division
of Banking Supervision and Regulation.
Citigroup’s proposed capital actions would leave the third-
biggest bank with Tier 1 common capital of 4.9 percent, below
the 5 percent minimum require by the regulators, according to
yesterday’s results. Citigroup would meet the requirement only
if it doesn’t change the amount of capital it returns to
shareholders, the test results showed.
A senior Fed official said in a conference call with
reporters that the central bank’s models showed higher estimated
losses than those submitted by the banks, while declining to
specify in what categories.
The results were originally due to be announced on March
15. The official said they were released early because of a
possible inadvertent release of information. The official said
JPMorgan Chase’s release was the result of miscommunication
between the Fed and the bank, and didn’t cause the Fed’s
accelerated release of the results.
To contact the reporters on this story:
Craig Torres in Washington at
ctorres3@bloomberg.net;
Cheyenne Hopkins at
Chopkins19@bloomberg.net;
Ian Katz in Washington at
ikatz2@bloomberg.net
To contact the editor responsible for this story:
Christopher Wellisz at
cwellisz@bloomberg.net
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Article source: http://www.bloomberg.com/news/2012-03-13/fed-says-15-of-19-banks-have-adequate-capital-in-stress-scenario.html
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