Nearly all of the nation’s largest banks have enough capital to withstand a severe recession and market turmoil, the Federal Reserve found in its latest stress test of the United States financial system.
The results, which were released on Thursday, paint a picture of a banking system that has substantially healed since the financial crisis of 2008.
They pave the way for the healthiest banks to begin buying back shares and increasing their dividends, which could further bolster their already soaring stock prices. It could also fuel the debate about whether banks, which have become increasingly better capitalized, should be loosening the reins on credit so more consumers and businesses can obtain loans.
In this year’s test, the Federal Reserve expanded the number of banks under review to 30 from 18, and included for the first time the United States units of several large European banks, Santander and Royal Bank of Scotland among them. By expanding the other firms with assets of greater than $50 billion, the stress test is capturing a wider swath of banks that regulators consider systemically significant.
Large banks that required substantial government support following the financial crisis, including Citigroup and Bank of America, had minimum capital ratio of 7 percent and 6 percent, respectively. JP Morgan Chase had a minimum capital ratio â€" technically called the Tier One Common Ratio - of 6.3 percent.
On the other end of the spectrum, Zions Bancorp had a Tier One Common Ratio of a 3.5 percent. Regulators require a minimum of roughly 5 percent.
Those that meet the minimum are likely to be emboldened to ask for larger dividend increases and more aggressive share buybacks. In some cases, many investors have been driving up the banks share prices in anticipation that they would get green light from the Fed. The regulators will release their decisions on the banks’ capital plans next week.
Thursday’s stress test results come by calculating potential bank losses on loans and other securities in a “severely adverse scenario†â€" a hypothetical world of high unemployment, market turmoil and a collapse of the banks’ major trading partners collapse.
The Federal Reserve also ran a separate test that scrutinized the banks’ ability to withstand a rapid rise in interest rates. While interest rates may not increase in reality by as much as they do in the Fed’s stress test, the results of this test - which were released for the first time this year â€" could give regulators and investors a sense of potential risks.
