Big banks have less than a month to submit their capital plans to the Federal Reserve as part of their annual Comprehensive Capital Analysis and Review. Wells Fargo & Co (NYSE: WFC) is off to shaky start to 2018, and analysts say this year’s Fed stress test will be harder on Wells Fargo than most other banks.
In February, the Fed released the details of this year’s stress test scenarios. According to Bank of America analyst Erika Najarian, the 2018 severely adverse scenario is more severe than expected. This year’s severe scenario includes a rapid 51 percent drop in equity markets and ultimately a 65 percent overall stock market decline. Last year’s test included only a 50 percent decline in the stock market over four quarters.
For Wells Fargo investors, the more troubling aspect of the scenario is the steep, double-digit decline in the real estate market in only two quarters. Wells Fargo must prove that it can maintain adequate capital given a rapid stock market sell-off, a 23 percent decline in the home price index and a spike in mortgage rates to 6 percent. In last year’s severe scenario, mortgage rates peaked at just 4.6 percent.