by Jon Lewin on March 14, 2012
Most of the largest U.S. banks, passed the latest set of “stress tests” form federal regulators, but at least four out of 19, including Citigroup, will need to resubmit capital plans to the Federal Reserve, which basically means that that their stock-buyback or dividend plans were rejected, the Wall Street Journal reports.
Along with Citigroup, Ally Financial Inc., SunTrust Banks Inc. and MetLife Inc. also were required to resubmit capital plans. Of the 19 banks tested, Ally Financial was the only one that did not meet the stress test’s capital requirements even without any proposed capital distributions.
Citigroup said that it did hit capital targets, as long as it did not raise its dividend or shared buybacks.
MetLife’s chief executive said the Fed’s “bank-centric” methodology was to blame for their poor shorwing. MetLife was the only insurance company tested. In 2001, Metlife became a bank holding company, but they are selling off their retail-deposit business and plan to no longer be a bank holding company by June 30.
The stress tests are intended to test if banks would have enough capital to continue to lend in the event of another financial crisis. Banks did much worse in the Fed’s first stress tests in 2009. This is the third set of stress tests.
Since no banks were required to raise capital immediately, U.S. banks appear to be in better shape than those in Europe, which have had to take significant measures to improve their balance sheets.
According to Bloomberg, the stress tests assumed that unemployment was at 13% with a 50% decline in stock prices and a 21% drop in house prices, which would cause banks to theoretically lose $534 billion over nine quarters. However, the 19 banks would see their Tier 1 common capital ratio, which measures bank strength against loss, remain about the 5% minimum required by the Fed. In this scenario, the ratio would fall to 6.3% in the fourth quarter of 2013. The Tier 1 common capital ratio was 10.1 in the third quarter of 2011.
American Bankers Association president Frank Keating said that the banking industry does not think stress tests under theoretical conditions that are even worse than what took place during the financial crisis are fair, Reuters reports.
“It unjustifiably prohibits some institutions from paying dividends to shareholders and could potentially impair their ability to raise capital and make loans. That is an unnecessary and ill-timed consequence of these stress tests given the essential role of banks in our still-recovering economy,” Keating said.
But the stress tests are designed to test a worst-case scenario. Before the 2008 financial crisis, those conditions might have been considered overly negative in a stress test. It was because the banks were unprepared for them that the crisis got worse. The stress tests are designed to prevent that from happening again, and they appear to be working so far.
Jon Lewin is a Feature Writer for the Compliance Exchange and Wall Street Job Report. He is also a columnist for the Faster Times and a blogger for Subway Squawkers. Lewin’s work has appeared in the New York Daily News, Huffington Post and Digital Innovation Gazette as well as the “Cambridge Companion to Baseball” and the Daily News history essay collection “Big Town Big Time.”