Banks Get Passing Grade
Stress tests results from the Federal Reserve regarding whether 18 of the
largest financial institutions can withstand a deep recession, were released
late Thursday. The Fed and the banks, for the stress tests, considered a
hypothetical nine-quarter scenario with a hypothetical unemployment rate of 12%.
Additionally, banks were required to evaluate how their capital buffers would
withstand a GDP decline of nearly 5% as well as a situation where equity prices
would fall by more than 50% over the course of the test recession. Stress test
results projected losses, revenue and net income for the banks, as well as a
wide variety of loan losses including mortgages and commercial real estate.
Results differ from initial stress test results released last week because they
are forward looking, taking into account each institution’s dividend and stock
buyback plans over the next 12 months. Stress test results from last week
focused on an average of each bank’s last four quarters of dividends. Generally,
banks must be able to project losses and revenues for particular categories of
assets in the stressful scenario, as well as how their capital would be impacted
at each stage of the stress period. The Fed said that if there is a problem with
a particular firm’s loss estimate, for example, the problem should be addressed
sooner rather than waiting to see whether they get it right in next year’s
Ally Financial, government-owned, failed final Fed stress test on Thursday with
1.52% in capital set aside under a measure called Tier 1 common capital ratio.
American Express (AXP) proposed adjusted capital plan came in at 6.4% and was
approved after a resubmission. The banks capital distribution plans were
rejected by the Fed last week with a 4.97% stress ratio for its tier 1 common
ratio, below the 5% regulatory minimum.
BB&T (BBT) dividend and stock buyback plan was rejected by the Fed as the bank
needs “certain adjustments” related to “unfunded lending commitments” which are
required to conform with regulatory guidance.
Goldman Sachs & Co. J.P. Morgan Chase & Co. (JPM) received passing grades from
the Fed however, are required to resubmit share distribution plans to the
central bank by the end of Q3 as the Fed cited “weaknesses” in their capital
Other financial institutions that passed the stress test, totaling 14 include:
Bank of America Corp. (BAC), Citigroup Inc. (C), Fifth Third Bancorp (FITB),
Regions (RF) and SunTrust Banks (STI) and are permitted to distribute their
capital and must resubmit plans next year for 2014 stress tests.
Senator Carl Levin (D-MI), chairman of Senate Permanent Subcommittee on
Investigations, on Friday said he is focused on J.P. Morgan’s (JPM) failure to
investigate repeated breaches of its own risk limits, mainly the London Whale
trade losses and internal oversight. Thursday evening, a report was released
accusing Morgan of misleading regulators as well as, hiding information about
the extent of its losses on the trades, a loss resulting in the write-off of
nearly $6 billion so far - as a result of runaway derivatives trading. Ina Drew,
former head of J.P. Morgan’s Chief Investment Office, testified before the
committee and, took the fall , describing her departure from Morgan in May 2012
as devastating, saying “This was my life’s work.” Levin said federal regulators
should track and investigate trading activities that cause large breaches of
internal bank risk limits. During the first three months of 2012 Morgan breached
key risk limits 170 times.
When a securities firm promises to deliver a Treasury security to a buyer but is
subsequently unable to obtain it in the market - that is a 'fail'. On Friday,
U.S. Treasury Department announced that it wants to examine trading that
occurred earlier this week in the 10-year note auctioned in February. As a
result, any market participant holding over $2 billion of the 10-year note as of
the close of business on March 11 must report its holdings to the government.
Earlier this week, Treasury officials said that market 'fails" reached elevated
levels and not only in the 10-year note. Any irregularities found by Treasury
will be discussed with the firm's primary regulator.
The New York Federal Reserve Bank said Friday that the Empire State
manufacturing index in March slipped to 9.2 in March from 10.0 in February,
remaining in positive territory for the second month after six straight negative
readings. Key new orders sub-index fell to 8.2 and shipment slipped to 7.8 in
The Federal Reserve said Friday that industrial production rebounded in
February, rising 0.7% on the back of stronger manufacturing and utility
production. Output at factories increased 0.8% and utility production rose 1.6%
due to the return of more normal winter temperatures. Capacity utilization rose
to 79.6%, the highest level since March 2008.
March consumer-sentiment gauge dropped to a preliminary reading of 71.8, for the
lowest level since December 2011, as reported by University of Michigan-Thomson
Reuters on Friday. Consumers face uncertainty from effects of federal spending
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Mar 15, 2013