Major Federal Reserve Stress Test Results Come In: 31 US Banks Clear Successfully

There’s some good news in the banking industry, as a recent round of stress testing shows.

Thirty-one United States banks took part in the testing, mandated by the Federal Reserve since the financial crisis of 2008.

The testing is typically conducted annually, and is done in multiple stages. The first round of testing went quite well, but there are bigger hurdles ahead.

The first round of stress testing was done to measure whether banks had sufficient capital on hand to absorb losses in the event of an economic downturn.

Here, two scenarios were used, the “adverse conditions” model—here defined as a weakening in global economic activity matched by an increase in Treasury yields—and the “severely adverse conditions” model, in which stocks fall 60 percent and housing prices drop 25 percent.Unemployment climbs to 10 percent, gross domestic product (GDP) falls 4.5 percent and the price of oil somehow manages to rise to $110 a barrel, with long-term Treasury issues hitting one percent before starting a slow climb back up.

Interestingly, out of all 31 banks, none had failed to meet capital thresholds.

Some were closer to the regulatory minimums than others, but everyone managed to at least hit the target, and most often surpassed it.

Just six banks came within two percent of breaching the required minimums as part of the “total risk-based capital ratio” testing; specifically, those banks were BBVA Compass Bancshares, Citigroup, Goldman Sachs, JP Morgan Chase, Morgan Stanley, and Zions Bancorporation.

However, banks fared worse on the “Tier-1 leverage ratio” studies, with several more banks hitting close to minimums. The previous six banks were on this danger list as well, and were joined by Bank of America, BNY Mellon, BMO Financial, HSBC North America, and State Street.

There were successes here as well; Bank of America improved in every capital measure over last year’s numbers, and Wells Fargo & Co. managed to beat every minimum measure by at least two percentage points.

However, there’s another test to go, and it’s regarded as a more important measure.

On March 11, the Federal Reserve releases results from a second round of tests that look at other scenarios. For right now, however, banks are doing well by most available measures.

Some are doing better than others, but that’s to be expected in most any environment. Knowing how the second round of tests turns out will likely have a much more pronounced impact on stock prices and the like, but for right now, things are looking fairly bright.