Big US banks pass stress tests even with harder scenarios

Pedestrians pass a Wells Fargo bank branch in lower Manhattan.
Pedestrians pass a Wells Fargo bank branch in lower Manhattan.PHOTO: AFP

NEW YORK (Reuters) - Big United States banks are proving themselves to be stronger and sounder in an annual regulatory stress test, even as the Federal Reserve changes doomsday scenarios to keep them on their toes.

On Thursday, the Fed said each of the 33 US banks that underwent its standardized stress test were able to stay above minimum required capital levels in severe economic and market conditions.

Banks that participated last year also passed, but their capital levels have largely improved since then. Overall, the 33 banks would suffer US$385 billion in loan losses over nine quarters under the most severe scenario, the Fed said.

In aggregate, a key ratio measuring high-quality capital against risk-weighted assets, known as the Tier 1 common equity ratio, would drop to a low of 8.4 per cent. That is well above the 4.5 per cent minimum set by regulators.

 

Since the Fed started stress testing banks in 2009, capital levels have risen and credit quality has improved, with bad loans rolling off the books.

The Fed creates new inputs for market and economic chaos each year, and shocked investors in January when it included negative interest rates in the worst-case scenario.

"Today's results are particularly notable given the more stringent test assumptions above last year's test," said Richard Foster, senior counsel for regulatory and legal affairs at the industry trade group Financial Services Roundtable. "Banks now hold extremely high levels of capital and liquid assets as compared with historical averages."

 

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Analyst Steven Chubak of Nomura Securities said, "For the big banks, the results were just incredibly robust."

Capital levels surged from last year's results as the Fed gave the big banks credit for more revenue at the end of test period than some of the banks themselves expected, Chubak said.