Seventeen of the 18 top US banks passed tough stress tests aimed at seeing if the financial industry could weather a new deep crisis, the US Federal Reserve announced on Thursday.
Government-controlled Ally Financial, the rescued former finance arm of General Motors, was the only bank to fail the test of capital strength.
Seventeen of the banks tested showed their capital levels would hold up above a 5 percent minimum threshold if the economy were again rocked with the kind of crisis that sent the US financial system reeling in 2007 and 2008.
The test showed that the banks were collectively much stronger than a year ago, with their aggregate common capital ratio holding up at 7.7 percent, even after losing US$462 billion in the theoretical crisis scenario.
“The stress tests are a tool to gauge the resiliency of the financial sector,” said Daniel Tarullo, a member of the Federal Reserve’s board of governors.
“Significant increases in both the quality and quantity of bank capital during the past four years has helped ensure that banks can continue to lend to consumers and businesses, even in times of economic difficulty,” Tarullo said.
The tests measured the banks’ abilities individually and collectively to withstand a fresh crisis involving a 50 percent plunge in equity prices, a 20 percent fall in housing prices and unemployment increasing to 12.1 percent, all of which would savage the banks’ loan and investment assets.
Starting from the third quarter last year level of 11.1 percent, average Tier 1 common capital ratio — a measure of core equity capital against risk assets — sank to 7.7 percent over nine quarters, the Federal Reserve said.
That was compared with their actual 5.6 percent level at the end of 2008, in the middle of the last financial crisis.
The result was an improvment from last year’s stress tests, when gross losses in a similar catastrophe scenario were US$534 billion.
Four banks failed the test set last year, although the test set-up was different to this years.
The banks had to submit their real capital plans, for example on investments, paying dividends and launching stock buybacks, before the tests were completed so that such plans could be incorporated into the tests.
This year, the banks’ capital plans will be reviewed next week, so are not incorporated into the stress tests.
Banks continued to assail the tests as understating their capital foundations, with Ally accusing the Fed of using “flawed assumptions” that reached “implausible” loss rates for the loans it holds.
American Bankers Association president Frank Keating objected to “the black-box nature of these tests, “ saying that they “make it difficult for banks to effectively improve how they manage their capital positions.”
Nevertheless, the results “are further proof that the banking industry has rapidly regained its health and is strong enough to withstand even the most challenging economic circumstances,” he added.