The initial results of the Federal Reserve’s latest round of bank stress tests are out. Only Ally Financial, the majority government-owned auto lender, saw its core capital—the Tier-1 common ratio, to be precise—drop below the regulatory minimum under a “severely adverse scenario”. All of the other big US banks were judged to hold sufficient capital to withstand a deep downturn between now and 2014.
The Fed will publish more comprehensive results on March 14th, when its stress tests will also take into account banks’ plans for managing their capital, including dividend payouts and share buybacks. Last year, Citigroup’s capital plan was rejected by the Fed, which considered its buyback proposals too aggressive in relation to its relatively thin capitalisation.
Although no bank besides Ally Financial failed the initial test this year, some skirted dangerously close to the minimum hurdle rates, suggesting that bullish dividend or buyback plans may not pass muster when they are included in the stress-test calculations. The banks themselves are required to run their own tests, using the same assumptions as the Fed. (Only half of the 18 banks tested have publicly released these self-examinations.) The results of bank-administered tests could be telling; unsurprisingly, most came to rosier conclusions about their capital strength than the Fed. If these lenders’ capital plans also take overly optimistic assumptions into account, a hasty rewrite over the weekend might be necessary.
The gap is widest at Goldman Sachs, which thinks its minimum core capital ratio would fall to 8.6% under the Fed’s assumptions, whereas the Fed itself sees steeper trading and lending losses pushing the bank’s minimum ratio to 5.8%, not far above the 5% required to pass the test.
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