WASHINGTON, D.C.: The 31 largest banks in the United States passed the first phase of regulatory stress tests, the Federal Reserve announced on Thursday (Friday in Manila).
But the three leading investment banks Goldman Sachs, JPMorgan Chase and Morgan Stanley were among the worst performers, mainly because of their greater exposures to capital markets.
In tests of their strength to withstand a severe economic crisis—one worse than that of 2008—all the banks proved capable of maintaining more than the minimum 5.0 percent level of core capital.
At that level, the Fed believes that the banks will not weigh the economy down and will be able to continue supporting economic activity—which was not the case during the crisis.
But the tests showed the investment banks with the largest exposure to capital markets came out among the weakest: Goldman’s Tier 1 capital ratio fell to 6.3 percent, JPMorgan 6.5 percent, and Morgan Stanley 6.2 percent.
The worst performer, as in last year’s stress tests, was Zions Bancorp of Salt Lake City, which barely topped the minimum with a core capital ratio of 5.1 percent.
Also coming in low in the severe-crisis scenario was BBVA Compass Bancshares, at 6.3 percent.
Industry growing stronger
But as a group the banks were stronger than in the 2014 tests, and it was the first time that no bank had fallen under the 5.0 percent level since the tests began in 2009.
Their average actual Tier 1 capital ratio going into the test was 11.9 percent, up from 11.5 percent a year ago. In the test the group average fell to 8.2 percent, compared with 7.6 percent last year.
“The largest US-based bank holding companies 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.
The tests, instituted in the wake of the 2008 crisis which bared extreme vulnerabilities in the banking system, sought to determine if individual banks and the system as a whole could weather a prolonged recession in which the economy contracts 4.5 percent in one year and the unemployment rate shoots up four percentage points.
That scenario wiped out $490 billion worth of bank assets, close to the amount in last year’s tests, but overall the banks proved they could stand the test.
The tests added this year the impact of a series of corporate defaults to which the investment banks would be most vulnerable.
Goldman barely topped another key measure of strength, the total risk-based capital ratio. At the end of the test it had 8.1 percent, just above the minimum 8.0 percent threshold.
The Fed made no comment on individual banks, but noted the steady improvement of the industry overall since the crisis.
“Higher capital levels at large banks increase the resiliency of our financial system,” Federal Reserve Governor Daniel Tarullo said.
“Our supervisory stress tests are designed to ensure that these banks have enough capital that they could continue to lend to American businesses and households even in a severe economic downturn.”
The tests form the basis of the Federal Reserve’s review of banks’ capital plans, crucially whether they can distribute benefits to shareholders via dividends and share buybacks that effectively reduce their capital base.
Those judgements will come from the Fed next week.
Frank Keating, president of the American Bankers Association, said that with total industry capital of $1.7 trillion, the tests show that banks “are well positioned to continue serving as a critical driver of our economic growth going forward.”