Fed: Biggest US banks strong enough to withstand recession

Posted June 23, 2017

In the past, some banks have been forced to reel back those plans in order to further build capital strength. Results from that round are due next week. Firms that handily clear the first phase typically have more room to make payouts to shareholders.

CIT was added this year to the banks tested by the Fed. And under regulators selected by President Donald Trump, that may continue.

Banks coming closest to not meeting the minimum capital ratio were Ally Financial, with a tested level of 6.5 percent; Capital One Financial, with 7.0 percent; Huntington Bancshares, 7.0 percent; KeyCorp, 6.8 percent; and SunTrust Banks, 7.1 percent.

The tests were put in place after the financial crisis to strengthen financial capacity in the event of a downturn.

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This is the seventh round of stress tests conducted by the central bank since 2009. And two, whether firms are good at identifying and measuring risk when they craft their plans. "They're doing better but still aren't generating enough economic earnings to backfill for a systemic shortfall".

The most severe hypothetical scenario projected $383 billion in loan losses among the 34 tested bank holding companies over nine quarters. Among other conclusions: Bank of America Corp. would suffer a US$26.4 billion hit to its pretax profit under that scenario, the most of any lender.

In addition, the eight largest firms would see $86 billion in trading losses, with JPMorgan Chase, the biggest bank by assets, suffering the biggest losses at $25 billion.

Under the Fed's examination, Citi's minimum CET1 ratio in the most stressful scenario was the highest among big Wall Street banks, at 9.7 percent. For example, Wells Fargo, a major lender to companies and for commercial real estate, estimated it would lose nearly US$20 billion less than the US$50.4 billion the Fed projected. But the bank can not do so without the Fed's approval.

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The Comprehensive Capital Analysis and Review (CCAR) is an annual exercise to evaluate the capital planning process and capital adequacy of large banks. The second round, however, uses different criteria, so that solid results from Thursday do not automatically signal that all the plans will be approved. The scandal triggered fines, lawsuits, a Justice Department investigation and a leadership shakeup that included the ouster of the company's chief executive officer.

Analysts say Citigroup Inc (C.N) has the most to gain or lose in the stress tests. Specifically, the tests will feature a sample portfolio to show how certain assets would be affected by the Fed's invented crisis, he said.

A Fed official said Thursday that the results show the industry is well-capitalized and credited the reforms with boosting lending for banks.

"Lending has expanded overall by the banking system, and also to small businesses", Federal Reserve Chair Janet Yellen said in February. Increasing dividends costs money and the government doesn't want banks to shrink their capital reserves, making them vulnerable in another recession.

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FILE - This Monday, July 18, 2016, file photo shows the top of a Bank of America ATM booth, in Woburn, Mass.