US Banks Fail Under Fed Stress Test

Posted: March 21, 2012 in Banks, Federal Reserve
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The results are in from the Federal Reserve’s 2012 Comprehensive Capital Analysis and Review (CCAR) and 15 of the 19 banks required to submit to the exam passed the stress test that included…

  • An adverse scenario of 13% unemployment.
  • A 50% drop in equity markets.
  • 21% decline in housing prices.

Most banks were expected to pass the Federal Reserve’s latest “stress tests,” which measure their ability to withstand another downturn. But that doesn’t mean they’ll make the grade with investing pros.

Four large banks failed the stress test.


The worst performance came from Ally, formerly the finance arm of General Motors known as GMAC: its tier one ratio fell to just 2.5 percent in the test from the actual 8.0 percent level reported in the third quarter of last year.


Citigroup — Failed the stress test with 4.9% capital ratio in something of a surprise. Fed rejected the firm’s proposal to increase capital return, which the bank plans to resubmit later in 2012, but did not object to it maintaining its dividend at current levels.


SunTrust Banks — Failed stress test with 4.8% capital ratio.


MetLife — Failed the stress test despite 5.1% minimum capital ratio, due to measure of risk-weighted capital. CEO Steven Kandarian said company is “deeply disappointed,” and that the Fed’s bank-based methodology is not a proper gauge of the financial strength of an insurer.

Some of the bigger banks that passed…

Wells Fargo

Wells Fargo –Passed stress test with 6% capital ratio, and added a 10-cent dividend to its previously announced first-quarter payout of 12 cents, an additional 83% that ups the firm’s quarterly dividend to 22 cents per share.

JP Morgan Chase

JPMorgan Chase — Passed stress test with 5.4% capital ratio under stressed scenario, including proposed capital actions through 2013. Increased its dividend 20% to 30 cents per share, from 25 cents, authorized a $15 billion stock buyback.

Topping that list of concerns is the European crisis. The balance sheets of American banks may be healthier than their counterparts on the continent, but they’re still not immune to the troubles there.

It’s not just European debt that investors are worried about, says Rodney Johnson, the president of HS Dent: Banks still aren’t being fully transparent about the value of other assets on their balance sheets. They are not “marking to market,” which means they’re not reporting the current market value of assets like mortgage-backed securities. “If you’re not marking your securities to market, then I don’t know what they’re worth, and I don’t believe you when you tell me what they’re worth,” he says. Johnson doesn’t own any large financial stocks. This applies to the Credit Union Corporates who still have massive exposure to mortgage-backed securities.

Investors may be better off at smaller banks, advisers say. Small banks are not exposed to risk from credit-default swaps.Small banks also have shortcomings, Johnson says. They make a lot of commercial real estate loans, some of which were written with sub-prime-like problematic terms, he says.

Banks and Credit Unions not “Marking to Market”, what is the real value of the asset? Your thoughts?


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