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Fed says U.S. banks breezed through stress tests
BARRIE McKENNA
Friday, April 24, 2009
WASHINGTON — Virtually all of the 19 largest U.S. banks have passed the Obama administration\'s controversial “stress test” with ease.
But there\'s a catch: For now, only the government and the 19 financial institutions involved in the exercise know the actual scores, designed to identify institutions that may need more capital to weather the recession.
News of passing grades prompted investors to push stocks higher yesterday after the U.S. Federal Reserve released broad details of the methodology it used to take a pulse of the banks. The Dow Jones industrial average rose 119.23 points, or 1.5 per cent, to close at 8,076.29 as investors absorbed the news about the stress tests.
The Federal Reserve, which carried out the analysis, estimated likely loan losses in 2009 and 2010 under two economic scenarios – one in line with current forecasts and another harsher “but plausible” forecast. The more severe scenario includes a 3.3-per-cent drop in gross domestic product this year, 10.3 per cent unemployment in 2010 and another 29-per-cent decline in house prices by 2010, according to the 19-page Fed report.
Speaking after a meeting yesterday of Group of Seven finance ministers in Washington, U.S. Treasury Secretary Timothy Geithner said the stress tests are part of a global effort to ensure there\'s adequate capital in the banking system.
“Our central objective is to make sure we have a financial system that is working for recovery and not against recovery,” Mr. Geithner told reporters. “We\'re seeing some encouraging signs.”
More broadly, Mr. Geithner said there are signs in the United States and elsewhere that the “pace of deterioration in economic activity and in trade flows has eased.” But he cautioned that it\'s “too early to say the risks have receded, and it\'s too early to conclude that we\'re beginning to emerge from this remarkably challenging set of pressures still working their way through the financial system and the global economy.”
White House Chief Of Staff Rahm Emanuel said the tests provide a “gradation” of the largest banks and should dispel confusion in the market.
“The stress test was developed as a way to have a demarcation that put that fear and confusion aside,” Mr. Emanuel told Bloomberg News. “That will be the test of the stress test: Whether it actually removes the fear and gives you a sense of clarity.”
The health of large U.S. banks, including Citigroup and Bank of America, has weighed heavily on the U.S. economy in recent months.
The Fed provided preliminary test results to the targeted banks yesterday. They won\'t be made public until May 4.
But an analysis yesterday by Morgan Stanley identified SunTrust Banks Inc., KeyCorp and Regions Financial Corp. as the banks most likely to require additional capital if the economy heads south. Two other banks – Bank of America Corp. and Wells Fargo & Co. – fall into a “grey zone” and may require some capital, Morgan Stanley said.
Morgan Stanley also said JPMorgan Chase & Co., PNC Financial Services Group Inc., Northern Trust Corp. and Bank of New York Mellon Corp. are “very unlikely to need capital.”
Speaking on a conference call with reporters, a senior Fed official said the “vast majority” of the banks “well exceed” the level and quality of capital that supervisors were seeking.
The Fed created a common benchmark for all 19 banks to determine how much of a capital buffer they would need to stay comfortably above current regulatory capital levels.
“We\'ll be looking for buffers, substantial buffers, over the minimum ratios,” a Fed official said.
The Fed did not say how much more capital banks might need. But the tests assumed that banks incorporate $900-billion (U.S.) of off-balance-sheet assets next year, and focused on common stock as a key component of capital.
The report offers the first peek behind how government officials are determining whether the largest banks need additional capital. The report says more than 150 federal regulators, examiners and economists have been involved in the process.
The Fed pointed out that the tests are not an effort to assess the viability of any of the banks.
“The assessment is a what-if exercise intended to help supervisors gauge the extent of additional capital needs across a range of potential economic outcomes,” the report pointed out. It is not “a measure of the current solvency or viability of the firm,” the Fed said.
The International Monetary Fund estimated this week that banks are facing writedowns in the U.S. of $2.7-trillion between 2007 and 2010.
In a sobering analysis, the IMF estimated that the combined equity of U.S. and European banks would be “close to zero” if the institutions recorded all remaining losses today.
The Fed\'s test covered 19 banks with assets of at least $100-billion.
Together, the banks hold two-thirds of all U.S. banking assets and half of all loans.
BARRIE McKENNA
Friday, April 24, 2009
WASHINGTON — Virtually all of the 19 largest U.S. banks have passed the Obama administration\'s controversial “stress test” with ease.
But there\'s a catch: For now, only the government and the 19 financial institutions involved in the exercise know the actual scores, designed to identify institutions that may need more capital to weather the recession.
News of passing grades prompted investors to push stocks higher yesterday after the U.S. Federal Reserve released broad details of the methodology it used to take a pulse of the banks. The Dow Jones industrial average rose 119.23 points, or 1.5 per cent, to close at 8,076.29 as investors absorbed the news about the stress tests.
The Federal Reserve, which carried out the analysis, estimated likely loan losses in 2009 and 2010 under two economic scenarios – one in line with current forecasts and another harsher “but plausible” forecast. The more severe scenario includes a 3.3-per-cent drop in gross domestic product this year, 10.3 per cent unemployment in 2010 and another 29-per-cent decline in house prices by 2010, according to the 19-page Fed report.
Speaking after a meeting yesterday of Group of Seven finance ministers in Washington, U.S. Treasury Secretary Timothy Geithner said the stress tests are part of a global effort to ensure there\'s adequate capital in the banking system.
“Our central objective is to make sure we have a financial system that is working for recovery and not against recovery,” Mr. Geithner told reporters. “We\'re seeing some encouraging signs.”
More broadly, Mr. Geithner said there are signs in the United States and elsewhere that the “pace of deterioration in economic activity and in trade flows has eased.” But he cautioned that it\'s “too early to say the risks have receded, and it\'s too early to conclude that we\'re beginning to emerge from this remarkably challenging set of pressures still working their way through the financial system and the global economy.”
White House Chief Of Staff Rahm Emanuel said the tests provide a “gradation” of the largest banks and should dispel confusion in the market.
“The stress test was developed as a way to have a demarcation that put that fear and confusion aside,” Mr. Emanuel told Bloomberg News. “That will be the test of the stress test: Whether it actually removes the fear and gives you a sense of clarity.”
The health of large U.S. banks, including Citigroup and Bank of America, has weighed heavily on the U.S. economy in recent months.
The Fed provided preliminary test results to the targeted banks yesterday. They won\'t be made public until May 4.
But an analysis yesterday by Morgan Stanley identified SunTrust Banks Inc., KeyCorp and Regions Financial Corp. as the banks most likely to require additional capital if the economy heads south. Two other banks – Bank of America Corp. and Wells Fargo & Co. – fall into a “grey zone” and may require some capital, Morgan Stanley said.
Morgan Stanley also said JPMorgan Chase & Co., PNC Financial Services Group Inc., Northern Trust Corp. and Bank of New York Mellon Corp. are “very unlikely to need capital.”
Speaking on a conference call with reporters, a senior Fed official said the “vast majority” of the banks “well exceed” the level and quality of capital that supervisors were seeking.
The Fed created a common benchmark for all 19 banks to determine how much of a capital buffer they would need to stay comfortably above current regulatory capital levels.
“We\'ll be looking for buffers, substantial buffers, over the minimum ratios,” a Fed official said.
The Fed did not say how much more capital banks might need. But the tests assumed that banks incorporate $900-billion (U.S.) of off-balance-sheet assets next year, and focused on common stock as a key component of capital.
The report offers the first peek behind how government officials are determining whether the largest banks need additional capital. The report says more than 150 federal regulators, examiners and economists have been involved in the process.
The Fed pointed out that the tests are not an effort to assess the viability of any of the banks.
“The assessment is a what-if exercise intended to help supervisors gauge the extent of additional capital needs across a range of potential economic outcomes,” the report pointed out. It is not “a measure of the current solvency or viability of the firm,” the Fed said.
The International Monetary Fund estimated this week that banks are facing writedowns in the U.S. of $2.7-trillion between 2007 and 2010.
In a sobering analysis, the IMF estimated that the combined equity of U.S. and European banks would be “close to zero” if the institutions recorded all remaining losses today.
The Fed\'s test covered 19 banks with assets of at least $100-billion.
Together, the banks hold two-thirds of all U.S. banking assets and half of all loans.
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