Big U.S. banks have enough capital to withstand severe stress -Fed

Thu Jun 23, 2016 4:30pm EDT
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By Lisa Lambert and David Henry

June 23 (Reuters) - All 33 U.S. banks that underwent regulatory stress tests this year were able to withstand severe economic and market conditions while staying above minimum required capital levels, the U.S. Federal Reserve said on Thursday.

Overall, big banks would suffer $385 billion in loan losses over a period of nine quarters under the most severe scenario, the Fed said. A key capital ratio measuring Tier 1 common equity as a portion of risk-weighted assets would drop to a low of 8.4 percent, in aggregate - well above the minimum set by regulators.

However, the results released on Thursday - part of a test known as "DFAST" - only offer a glance of big banks' capital pictures under stress. On June 29, the Fed will release results of a more comprehensive test, known as "CCAR," which will include whether or not banks can buy back as much stock and pay out as many dividends as they had planned.

"DFAST is sort of like a dress rehearsal for the CCAR," said Ernie Patrikis, a partner at the White & Case law firm and a former bank regulatory official at the Federal Reserve Bank of New York.

DFAST, short for the Dodd-Frank Act Stress Test, is part of the sweeping financial reform law passed in the wake of the 2007-2009 financial crisis. It relies on standardized assumptions about capital levels and distributions for the tested banks, allowing for a consistent view across the industry.

The Fed does not pass or fail banks in this stage of testing, but they can fail "CCAR," which is short for Comprehensive Capital Analysis and Review. That test evaluates banks' individually tailored plans for surviving a crisis.

Regulators view both rounds as tools to ensure banks have enough money to stand on their own in a future financial crisis and not turn to the federal government for billions of dollars in bailouts.

Of the 33 banks that took part in DFAST, Huntington Bancshares Inc produced the lowest minimum Tier 1 common equity ratio, of 5 percent, under a severely adverse scenario. Morgan Stanley produced the weakest Tier 1 leverage ratio - another measure of capital strength relative to assets - of 4.9 percent, under that scenario.   Continued...