U.S. big banks have enough capital buffers to withstand a drastic economic downturn, the Federal Reserve said on Thursday, announcing that 29 out of 30 major banks met the minimum hurdle in its annual health check.
All of the big banks except for Zions Bancorp stayed above the 5 percent requirement for top-tier capital in the latest round of stress tests.
The tests aim to show how banks would weather a financial collapse similar to the 2007-2009 crisis. Banks had to show how they would cope with a halving of the stock market, and the eight largest banks had to weigh the impact of the default of their biggest trading counterparty.
"While capital is certainly better than it has been in past years, these firms certainly are subject to drops in capital and earnings when subject to severe stress," said John Corston, a director in Deloitte's regulatory group.
Several firms appeared to disagree with the Fed's scores. Bank of America and Wells Fargo released the results of internal stress tests that showed them performing better than they did under the regulators' tests.
Stress tests are closely watched by financial markets as a sign of the industry's health, and also because the Fed can reject banks' plans to return capital to shareholders if they think the banks are not strong enough to carry them out.
European regulators plan to conduct their own stress tests later this year, following a broad review of the asset quality of banks on the continent.
The Fed will announce on March 26 which banks' plans to pay dividends or buy back shares were approved.
CAPITAL PLAN SPECULATION
For the results released on Thursday, the Fed assumed banks would keep dividends at their current levels and buy back no shares. This release sets off several days of speculation about whether banks with relatively low capital ratios will be allowed to increase dividends.
"The only results that are more nerve racking than stress test results for bankers are their bonus results," said Dan Ryan, head of PricewaterhouseCoopers's financial services advisory practice.
"Although almost every bank came above the capital floor in today's results, we think two to four won't be able to satisfy the Federal Reserve next week that their planned capital actions are appropriate," he said.
Zions was the only bank to miss the minimum, with a tier 1 capital ratio of 3.5 percent in the most severe stress scenario. A spokesman for Zions was not immediately available for comment.
Zions said last month that it expected to resubmit its capital plan due to the sale of some securities that contributed to losses under the toughest stress scenario.
The other 29 banks stayed above the minimum levels. But M&T Bank came in relatively low, at 5.9 percent, and Bank of America's tier 1 ratio was 6 percent.
Bank of America, however, released its own stress tests that showed its capital ratio at a much higher 8.6 percent. A spokesman for the bank declined to comment.
Wells Fargo also released internal test results that were higher than the marks it received from the Fed.
Bank of New York Mellon , Discover Financial Services and State Street had the highest capital ratios. Discover announced shortly after the release on Thursday that it planned to increase its quarterly dividend.
Capital ratios are not always clear indicators of whether the Fed will approve a bank's capital plan. Last year, regulators directed JPMorgan Chase and Goldman Sachs to redo their proposals due to concerns about their capital planning processes.
The group of 30 banks' aggregate tier 1 common capital ratio dipped to 7.6 percent under the toughest stress scenario. That ratio was 5.5 percent at the beginning of 2009, the Fed said.
This was the first year that Zions and 11 other banks, among which were Comerica and Discover, participated in the full stress test regime.
The other 18 banks, among which were JPMorgan, Citigroup and Morgan Stanley , participated in previous rounds. Together, the 30 banks accounted for about 80 percent of total banking assets in the United States, the Fed said.
(Reporting by Emily Stephenson, additional reporting by Peter Rudegeair and David Henry in New York; Editing by Douwe Miedema, Leslie Adler and Bernard Orr)