Risk Management

Big Banks Pass Fed’s Capital Buffer Tests

The Federal Reserve's stress tests found that the U.S.'s 31 biggest banks are capitalized well enough to withstand a "severely adverse" economic sc...
Matthew HellerMarch 6, 2015

The 31 largest banks in the U.S. appear to be better equipped than ever to survive a prolonged economic slump, according to stress tests conducted by the U.S. Federal Reserve.

In the first phase of this year’s testing, the Fed examined whether the banks have enough capital to withstand the “severely adverse scenario” of nine quarters of stressful economic conditions. According to the results released Thursday, not one firm fell below any of the main capital thresholds — the first time that has happened since the Fed began the stress tests to avoid a repeat of the 2008 financial meltdown.

The largest banks “continue to build their capital levels and to strengthen their ability to lend to households and businesses during a period marked by severe recession and financial market volatility,” the Fed said in a news release.

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In the “severely adverse scenario,” the banks’ aggregate common capital ratio, which compares high-quality capital to risky assets, would fall from 11.9% in the third quarter of 2014 to 8.4% in October 2016. That was above the 8.2% minimum and compares with aggregate capital ratios of 5.5% in the beginning of 2009 and 7.6% last year.

“It means our banking sector is pretty healthy right now from the perspective of how much money they are holding,” Anna Krayn, head of stress testing for Moody’s Analytics, told USA Today. “Some would argue that there’s excess capital in the system,” she said.

Among individual banks, Goldman Sachs passed the 8% minimum for total risk-based capital by 0.1 percentage point and Morgan Stanley’s ratio in three capital measures fell to within 1 percentage point of the required minimum.

Bank of America was the only firm among the six largest to improve in every capital measure from its performance in last year’s test, while Wells Fargo surpassed every minimum by at least 2 percentage points.

Zions Bancorporation, which was the only bank last year to come in below one of the Fed’s main capital thresholds, again had the lowest common capital ratio this year.

The second round of tests, to be released March 11, assesses the banks’ ability to weather losses and still pay dividends, buy back stock, or make acquisitions.