WASHINGTON (MarketWatch) — The first part of a long-awaited two-stage stress test for big banks is in and all but one stayed above minimum financial ratios set out in the test.
That’s according to initial Federal Reserve results released Thursday, seeking to find out if 18 of the largest financial institutions could withstand a deep recession like the credit crunch of 2008.
Ally Financial Inc., majority owned by the government, was the only bank that failed to meet one of the key ratios. The test showed that Ally had 1.5% in capital set aside under a measure known as Tier 1 common ratio, which compares the bank’s common equity to its risk-weighted assets. That is significantly below the generally accepted standard of 5%. The other 17 institutions fared better, but many experienced major mortgage, securities and loan losses under the recession scenario.
With the test, banks and the Fed considered a hypothetical nine-quarter scenario with an unemployment rate of roughly 12% — up from 7.9 % in January. Banks also evaluated how their capital buffers would withstand real GDP declining by around 5% and equity prices falling by more than 50%.
These results consider an average of the last four quarters of dividend payments at each bank. The final results, which will be released on March 14, could change significantly for some banks because they are based on each institution’s proposed capital distribution plans, including dividends and share repurchases, for the next 12 months.
The Fed said banks cannot pass or fail Thursday’s test because the regulatory thresholds don't count this time. However, on March 14 they will and the Fed will announce whether or not it approves each institution’s payout plans.
However, on Thursday, the Fed gave the banks some private guidance about whether their capital distribution plans will be approved or rejected. Watch out: Some banks may publicly disclose their tentatively approved payout plans Thursday. Institutions that keep quiet may be doing so because they have to resubmit less ambitious plans for approval March 14.
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