The country’s biggest banks are all well-positioned to survive a severe recession, the Federal Reserve announced Thursday.
The announcement was the result of the Dodd–Frank Stress Test, which found that all 31 banks tested hold enough capital to continue lending during a “severely adverse” scenario, the Fed said.
In the “severely adverse” scenario, the country falls into a deep recession with the unemployment rate peaking at 10%, a 25% decline in home prices, a stock market drop of nearly 60%, and a notable rise in market volatility.
Under those conditions, the 31 banks, which represent more than 80% of domestic banking assets, would suffer loan losses of $340 billion during the nine quarters tested, but would not lose the ability to continue lending.
“Capital is important to banking organizations, the financial system, and the economy because it acts as a cushion to absorb losses and helps to ensure that losses are borne by shareholders, not taxpayers,” the Fed said in a release.
"Higher capital levels at large banks increase the resiliency of our financial system," Federal Reserve Governor Daniel Tarullo said. "Our supervisory stress tests are designed to ensure that these banks have enough capital that they could continue to lend to American businesses and households even in a severe economic downturn."
According to analysis from FBR Capital Markets, one bank’s results made it the big “winner” in the stress test.
“While the Comprehensive Capital Analysis and Review released next Wednesday, March 11, factors in additional layers, like capital deployment request and qualitative metrics, which are unpredictable, we believe last night's stress test was a positive for Bank of America (BAC),” FBR Analysts Paul Miller, Bob Ramsey and Scott Valentin wrote in a note to clients.
“Though qualitative metrics are difficult to predict, we believe BAC's significant improvement from a 6.0% Tier 1 common ratio to a 7.1% Tier 1 common ratio in this year's DFAST results provided a significant margin for error for the company,” the analysts continued. “Further, BAC did the best of the ‘Big 4’ in the severely adverse scenario in some categories, even surpassing Wells Fargo (WFC), which remains our favorite ‘high quality’ pick in the bank space.”
Another bank that turned in a strong result was Huntington Bancshares (HBAN). “The Fed estimated HBAN's Tier 1 common ratio under the adversely severe scenario would decline to 9.0%, a significant improvement from last year's 7.4% level,” FBR’s analysts wrote.
On the other hand, FBR noted three banks that “disappointed” compared to last year’s results. According to FBR, Fifth Third (FITB), Regions Financial (RF) and SunTrust (STI) all saw their Tier 1 common equity ratios fall from 2013.
“We had modeled higher capital deployment levels at all three companies and believe those could be at risk of disappointing in next week's CCAR results given the weaker results from the 2014 stress test,” the FBR analysts wrote.
For the full results of the Fed’s stress test, click here.
