The FRB released the summary results of the 2014 annual stress tests conducted by large financial institutions pursuant to the Dodd-Frank Act. 30 banking organizations participated in the 2014 stress tests. The financial institutions participating in the 2014 stress tests hold in the aggregate approximately $13.5 trillion of assets, or nearly 80% of domestic bank holding company assets.
The capital adequacy of the participating banks are measured in an adverse and in a severely adverse scenario. Under the severely adverse scenario, projected loan losses at the 30 bank holding companies participating in the 2014 stress tests would total $366 billion during the nine quarters of the scenario. Under such scenario, the aggregate Tier 1 common capital ratio of the institutions would fall from an actual 11.5% in the third quarter of 2013 to the minimum level of 7.6%. The severely adverse scenario models for a deep recession with a sharp rise in the unemployment rate, a drop in equity prices of nearly 50%, and a decline in house prices to levels last seen in 2001. The FRB noted that the performance of the participating institutions in the 2014 stress test was significantly improved over performance in the initial stress tests conducted in 2009.
Of the 30 participating institutions, all but one maintained Tier 1 capital in excess of the 5% threshold to be considered “adequately capitalized” under the severely adverse scenario. Further, only one other institution failed to maintain Tier 1 capital in excess of the 6% threshold to be considered “well capitalized” under the severely adverse scenario.
The FRB noted that the quantitative results from both the adverse and the severely adverse scenarios in the supervisory stress tests are only one component in the FRB’s analysis during its Comprehensive Capital Analysis and Review (“CCAR”). CCAR is an annual exercise in which the FRB evaluates the capital planning processes and capital adequacy at the largest financial institutions. The FRB will announce the results of the CCAR on Wednesday, March 26, 2014 at 4 p.m. EDT. The results of the CCAR affect the ability of the subject financial institutions to make capital distributions.
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