Unveiling the results of its latest round of stress tests, U.S. bank regulators say that the big banks would be in a much better capital position if a major financial crisis hit now than they were amid the previous crisis.
The U.S. Federal Reserve Board released summary results of the latest stress tests Thursday. It reports that the largest bank holding companies “have continued to improve their ability to withstand an extremely adverse hypothetical economic scenario and are collectively in a much stronger capital position than before the financial crisis.”
In a hypothetical stress scenario, which includes an unemployment rate of 12.1%, a drop in equity prices of more than 50%, and a 20% decline in housing prices, the report estimates that the 18 largest bank holding companies would suffer aggregate losses of US$462 billion.
It also projects that the aggregate tier 1 common capital ratio would fall from 11.1% in the third quarter of 2012 to 7.7% by the fourth quarter of 2014. Yet, even this large decline would leave the banks with more capital than they had at the end of 2008, when the actual aggregate tier 1 common ratio for the 18 firms was approximately 5.6%.
“The stress tests are a tool to gauge the resiliency of the financial sector,” noted Federal Reserve governor, Daniel Tarullo. “Significant increases in both the quality and quantity of bank capital during the past four years help ensure that banks can continue to lend to consumers and businesses, even in times of economic difficulty.”