dglobalnews.com Biggest US banks clear first hurdle in Fed's annual stress tests
Published: Fri, June 23, 2017
Markets | By Armando Jensen

Biggest US banks clear first hurdle in Fed's annual stress tests

Biggest US banks clear first hurdle in Fed's annual stress tests

WASHINGTON/NEW YORK The 34 largest US banks have all cleared the first stage of an annual stress test, showing they would be able to maintain enough capital in an extreme recession to meet regulatory requirements, the Federal Reserve said on Thursday.

The first round of the central bank's annual "stress tests" showed that as a group, the 34 big banks have gained strength thanks to a steadily recovering economy.

"This year's results show that, even during a severe recession, our large banks would remain well capitalized", Fed Governor Jerome Powell said in a statement. The Fed said the losses would reduce the banks' high-quality capital from 12.5 percent of its loans in the fourth quarter past year to 9.2 percent at the end of 2017.

The tests were put in place after the financial crisis to strengthen financial capacity in the event of a downturn.

Wells Fargo & Co's US$7.7 billion in trading and counterparty losses came close to firms with larger Wall Street operations, with Morgan Stanley at US$9.5 billion.

Even with the hypothetical declines, capital levels at the banks would still be much higher than they were following the 2008 financial crisis, when Tier 1 capital ratios for the firms fell to about 5.5 percent at the end of that year. The Federal Reserve plans to publicly release the results of CCAR on Wednesday, June 28, 2017. This year's results are all the more consequential seeing as they're the last stress tests banks will ever have to face now that we live in Trump's America. That is much better than the 4.5 percent threshold that regulators demand, and an improvement on the 8.4 percent common equity tier 1 capital ratio assessed previous year. But the bank can not do so without the Fed's approval.

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Tier 1 common ratio is a measurement of a bank's core equity capital compared with its total risk-weighted assets.

In last year's second round, the Fed barred USA businesses of two European banks, Germany's Deutsche Bank and Spain's Santander, from raising dividends or boosting stock buybacks.

Next week, banks will learn whether the Fed is blocking or approving its plans to buy back stock or pay dividends to shareholders. The Fed has also seen the tactic as a way to poke around bank balance sheets for weak assets.

That means even if a bank passed previous year, there's no guarantee it will do so again.

Each year, regulators tweak the exam to keep banks on their toes. Bank of America's was 0.7 of a point worse.

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