The U.S. Federal Reserve Board said Tuesday that its latest stress tests show that most large U.S. banks would still have adequate capital, even in a severe economic downturn.
The Fed said 15 of 19 major banks passed the stress test. Among the four banks the failed is Citigroup, the third-largest bank in the United states.
The Fed announced summary results of the latest round of bank stress tests, which it says shows that the majority of the big banks “would continue to meet supervisory expectations for capital adequacy” despite large projected losses in a hypothetical episode of severe economic and financial stress.
The stress scenario, which includes a peak unemployment rate of 13%, a 50% drop in equity prices, and a 21% decline in housing prices, would generate estimated losses of $534 billion at the 19 bank holding companies that were tested. And, the aggregate tier 1 common capital ratio, would fall from 10.1% in the third quarter of 2011 to 6.3% in the fourth quarter of 2013 in the hypothetical stress scenario.
Despite the large hypothetical declines, the Fed says that the post-stress capital level in the test exceeds the actual aggregate tier 1 common ratio for the 19 firms prior to the government stress tests conducted in the midst of the financial crisis in early 2009, and reflects a significant increase in capital during the past three years.
“In fact, despite the significant projected capital declines, 15 of the 19 bank holding companies were estimated to maintain capital ratios above all four of the regulatory minimum levels under the hypothetical stress scenario, even after considering the proposed capital actions, such as dividend increases or share buybacks,” it says.