Moving unexpectedly two days ahead of schedule, the Federal Reserve Board released the results of its annual stress test Tuesday afternoon, with certain large banks emerging as the strongest among their competitors.
Overall, most firms met those thresholds, with some significant exceptions, including Citigroup Inc. and SunTrust Banks Inc., which just missed the minimum with a low of 4.9% and 4.8%, respectively. The government-controlled Ally Financial Inc. was the weakest of them at 2.5%.
Among mortgage lenders Citigroup, Ally, and SunTrust rank fourth, fifth and 12th respectively, according to figures compiled by National Mortgage News.
Bank of New York Mellon Corp., State Street Corp., and American Express Co. all produced the strongest results when it came to surpassing the 5% minimum of Tier 1 capital they were asked to meet by the Fed in a hypothetical stress scenario, including plans for issuing dividends or share repurchases.
The Fed purposefully did not disclose which quarters the banks' reached these minimums in order to prevent the market from interpreting when a bank might take a capital action.
For their part, Bank of New York, State Street, and American Express reached double-digit minimums of 13%, 12.5% and 10.8% respectively, in that category.
Firms had also been asked to meet a 4% Tier 1 ratio, 8% Total Capital Ratio, and 3% or 4% Tier 1 leverage ratio, depending on whether the company is subject to the market-risk capital charge. Again, those same firms produced similarly strong results those categories.
Firms have had to undergo stress tests before, but this round marks the first time since the financial crisis that the results will be made public — and it is arguably the most severe version of the test, given the harsh variables that banks had to score themselves against.
Those variables included projecting a bank's condition if unemployment jumped to 13% (it is currently at 8.3%), the Dow Jones Total Market Index fell to 5,700 points and a sharp decline of gross domestic product to minus-8%.
Six of the firms were also asked to run a global market shock scenario that replicates similar events that occurred during the second half of 2008.
Based on the results of the stress tests, the banks, on an aggregate basis, experienced significant losses totaling $534 billion over the nine-quarter horizon. The majority of those losses came from loan portfolios and from trading and counterparty losses from the hypothetical global financial market shock.
Losses on consumer related lending like residential mortgages, credit cards and other consumer loans accounted for 69% of the projected loans losses and 44% of total projected losses for all of the banks combined.
Results varied in each of the subcategories that the Fed tested including loan losses, junior liens, commercial and industrial loan loss based on each bank's portfolio. For example, Capital One Financial Corp. and Citigroup suffered the deepest loan losses under the Fed's stress test, while State Street held the biggest loss when it came to commercial real estate.
The Fed had initially been scheduled to release the stress test results on Thursday, but the central bank moved earlier after several banks, including JPMorgan Chase & Co., began releasing their results individually.
