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The Fed announced the results of its bank stress tests Tuesday, which
likely contributed to a late afternoon rally in equity markets. The
results will be sliced and diced in coming days, but overall, the
results seem generally positive and underscore just how much cash and
core capital banks have squirreled away over the last few years.
The report tested bank capital levels assuming current dividend and
share buy-back plans were left in place, along with a 21% decline in
housing prices, 13% unemployment and a 50% decline in stock prices.
It'll be hard for critics to say regulators let the banks off easy—such a
scenario seems fairly dramatic, especially considering current stock
and home valuations aren't exactly bubbly.
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Fifteen of the nineteen banks passed their capital requirements, with
one passing on its most important capital ratios and just missing a
leverage ratio. (See Exhibit 1, which shows post-stress results on bank
capital levels.) Of the other three to miss, one missed by 0.1% and the
other by 0.2%. (Metlife did fail one of the leverage ratios by 0.1% but
passed the capital level.) These banks must resubmit plans and will be
restricted on share buy backs and dividends until they pass, but the
miss seems pretty manageable.
Exhibit 1: Summary of Stress Tested Bank Capital Levels
|Below 5.0% is failure||
Tier 1 Common Ratio|
Post Planned Capital Spending|
Sun Trust Banks||4.8|
Bank of America||
PNC Financial Services||
Wells Fargo & Company||
Fifth Third Bancorp||
Regions Financial Corp||
Capital One Financial Corp||
American Express Company||
State Street Corp||
Bank of New York Mellon||
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Source: Federal Reserve
Some critics argue the stress test was largely counterproductive,
causing banks to hoard cash unnecessarily during a period when the US
economy needs growing credit to goad economic growth. And we'd largely
agree banks haven't had unfettered incentive to make loans as they
deemed appropriate. But if the stress tests help boost sentiment, that's
an incremental positive. What's more, moving past this stress test
means passing banks can shake off some additional regulatory strictures
(e.g., limits on buy backs and dividends)—another additional positive
for the economy which counts on banks to assist in the process of
allocating capital to where its used most effectively and efficiently.
A healthy banking system provides a key backdrop for economic growth,
and today's stress tests continue to show the US is increasingly headed
in that direction.
source: Market Minder
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