By Lisa Lambert and David Henry
June 23 (Reuters) - All 33 U.S. banks that underwent
regulatory stress tests this year were able to withstand severe
economic and market conditions while staying above minimum
required capital levels, the U.S. Federal Reserve said on
Thursday.
Overall, big banks would suffer $385 billion in loan losses
over a period of nine quarters under the most severe scenario,
the Fed said. A key capital ratio measuring Tier 1 common equity
as a portion of risk-weighted assets would drop to a low of 8.4
percent, in aggregate - well above the minimum set by
regulators.
However, the results released on Thursday - part of a test
known as "DFAST" - only offer a glance of big banks' capital
pictures under stress. On June 29, the Fed will release results
of a more comprehensive test, known as "CCAR," which will
include whether or not banks can buy back as much stock and pay
out as many dividends as they had planned.
"DFAST is sort of like a dress rehearsal for the CCAR," said
Ernie Patrikis, a partner at the White & Case law firm and a
former bank regulatory official at the Federal Reserve Bank of
New York.
DFAST, short for the Dodd-Frank Act Stress Test, is part of
the sweeping financial reform law passed in the wake of the
2007-2009 financial crisis. It relies on standardized
assumptions about capital levels and distributions for the
tested banks, allowing for a consistent view across the
industry.
The Fed does not pass or fail banks in this stage of
testing, but they can fail "CCAR," which is short for
Comprehensive Capital Analysis and Review. That test evaluates
banks' individually tailored plans for surviving a crisis.
Regulators view both rounds as tools to ensure banks have
enough money to stand on their own in a future financial crisis
and not turn to the federal government for billions of dollars
in bailouts.
Of the 33 banks that took part in DFAST, Huntington
Bancshares Inc HBAN.O produced the lowest minimum Tier 1
common equity ratio, of 5 percent, under a severely adverse
scenario. Morgan Stanley (NYSE:MS) MS.N produced the weakest Tier 1
leverage ratio - another measure of capital strength relative to
assets - of 4.9 percent, under that scenario.
Banks that look marginal in DFAST may well have submitted
capital plans that include the issuance of securities that would
dramatically affect their capital scores. And, banks with strong
numbers can still fail CCAR because the Fed judged the quality
of their capital planning faulty.
Citigroup Inc (NYSE:C) C.N , for example, has had surprising results
for both reasons. In last year's DFAST scores, Citigroup looked
like it was at risk of failing when one measure of its capital
came up barely above that minimum. But, unknown to investors,
Citigroup's capital plan included steps that significantly
improved its measure of strength.
In 2014, Citigroup's numbers were good, but the Fed rejected
its plan after concluding that the bank could not track its risk
of loss across its global operations.
Banks have until Saturday to resubmit their capital plans to
the Fed, in order to pass muster in CCAR.
Thirteen banks have failed CCAR since the Fed began
disclosing results with the 2012 test, according to research
firm Trepp. That is about three each year. Last year, two failed
on qualitative reasons. Four more were required to make specific
remedies as part of conditional approvals of their plans.
About two-thirds of the banks will likely be allowed to
increase their dividends, analysts at Trepp predicted in an
analysis carried out before the stress test results were
released. But the percentage approved for dividends has been
ticking down from 72 percent in 2013 to 67 percent in 2014, and
61 percent in 2015.
"Banks generally are doing pretty well on earnings, so there
is capacity to increase their dividends," said Matt Anderson,
managing director at Trepp.
As the Fed crunched numbers to determine whether banks would
have enough capital to withstand different hypothetical
scenarios, the banks themselves also run their own stress tests.
Many banks typically release their own results later on
Thursday.
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Graphic - Federal Reserve bank stress test http://tmsnrt.rs/28QAfLJ
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