Stress tests aim to project crisis-like conditions on capital strength
Washington – Arabstoday
All but one of 18 top US banks passed tough stress tests aimed at seeing if the financial industry could weather a new deep crisis, the Federal Reserve announced on
Government-controlled Ally Financial, the rescued former finance arm of General Motors, was the only bank to fail the test of capital strength, AFP has reported.
Seventeen of the banks tested showed their capital levels would hold up above a five percent minimum threshold if the economy were again rocked with the kind of crisis that sent the US financial system reeling in 2007-2008.
The test showed the banks collectively were much stronger than a year ago, with their aggregate common capital ratio holding up at 7.7 percent, even after losing $462bn in the theoretical crisis scenario.
"The stress tests are a tool to gauge the resiliency of the financial sector," said Daniel Tarullo, a member of the Fed's Board of Governors.
"Significant increases in both the quality and quantity of bank capital during the past four years help ensure that banks can continue to lend to consumers and businesses, even in times of economic difficulty."
The tests measured the banks' abilities individually and collectively to withstand a fresh crisis involving a 50 percent plunge in equity prices, a fall of housing prices by 20 percent, and unemployment shooting to 12.1 percent, all of which would savage the banks' loan and investment assets.
Starting from the third quarter 2012 level of 11.1 percent, average Tier 1 common capital ratio -- a measure of core equity capital against risk assets -- sank to 7.7 percent over nine quarters, the Fed said.
That compared with their actual 5.6 percent level at the end of 2008, in the middle of the last financial crisis.
The overall result improved from last year's stress tests, when gross losses in a similar catastrophe scenario ran up to $534bn.
Four banks failed the test then, though there was a difference in the test set-up.
The banks had to submit their real capital plan, on investments, paying dividends and launching stock buybacks for instance, before the tests were completed, so that the plans were incorporated into the tests.
This year, the banks' capital plans will be reviewed next week, and so are not incorporated into the stress tests.
Banks continued to assail the tests as understating their capital foundations, with Ally accusing the Fed of using "flawed assumptions" that reached "implausible" loss rates for the loans it holds.
American Bankers Association president Frank Keating objected to "the black-box nature of these tests" that "makes it difficult for banks to effectively improve how they manage their capital positions."
Nevertheless, the results "are further proof that the banking industry has rapidly regained its health and is strong enough to withstand even the most challenging economic circumstances," he added.