Biggest Banks Clear Their First Hurdle in Fed's Stress Tests

Biggest Banks Clear Their First Hurdle in Fed's Stress Tests

The Fed said that overall, the 34 banks "have strong capital levels and retain their ability to lend to households and businesses during a severe recession".

The results of the central bank's so-called stress tests showed 34 major lenders were on solid capital footing, it said.

The banks have built up deeper cushions against such a downturn since the 2008 financial crisis, and would maintain a 9.2% ratio of capital as a share of assets under such a scenario, the Fed said.

This is the seventh round of stress tests led by the Federal Reserve since 2009 and the fifth round required by the Dodd-Frank Act. The Federal Reserve uses its own independent projections of losses and incomes for each firm.

According to the stress tests, the 34 largest American banks would incur almost 383 billion US dollars in loan losses during the most severe scenario where the unemployment rate will rise to 10 percent and a severe global recession will accompany with heightened stress in corporate loan markets and commercial real estate. The Treasury Department issued a report last week proposing tests occur less frequently, that highly capitalized banks be exempt from the process and that one of the toughest hurdles be scrapped.

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Since 2009, the almost three dozen firms have added more than $750 billion in capital to their coffers. With the Dodd-Frank results in hand, now banks have the option of revising their capital plans before CCAR is released.

The results of the CCAR - in which banks' buyback and dividend plans are evaluated - are set for release after the market close on Wednesday. Its results are being watched especially closely by shareholders who have been wanting management to buy back more of its common stock, which is trading below what its assets are worth.

It's the third consecutive year there have been no banks failing.

Analysts say Citigroup Inc (C.N) has the most to gain or lose in the stress tests. Even one of the tests' staunch champions, former Fed Governor Daniel Tarullo, said before he stepped down in April that it might be time to ease up on the qualitative side of the test for Wall Street banks, as the Fed already did for mid-size lenders.

The biggest USA banks' own estimates for loan losses were more optimistic than the Fed's - a trend that has arisen in past years as well. They then ask what that would do to a bank's balance sheet. Bank of America's was 0.7 of a point worse.

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