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Thursday, March 5, 2015

Fed Announced All Banks Adequately Capitalized

All 31 banks that underwent the Fed’s stress test are adequately capitalized, according to the results of supervisory stress tests announced by the Federal Reserve. ABA president and CEO Frank Keating responded to the results:

We’re pleased that banks’ aggressive efforts to build capital and liquidity over the last five years have enabled them to perform so strongly even under these severe hypothetical stress scenarios. With total industry capital now over $1.7 trillion, banks are well positioned to continue serving as a critical driver of our economic growth going forward. Banks’ improved capital positions and strong balance sheets should allow institutions to continue meeting customer needs and to pay dividends that help attract investors to fund future growth.

The most severe hypothetical scenario projects that loan losses at the 31 participating bank holding companies would total $340 billion during the nine quarters tested. The "severely adverse" scenario features a deep recession with the unemployment rate peaking at 10%, a decline in home prices of 25%, a stock market drop of nearly 60%, and a notable rise in market volatility. The 31 firms' aggregate tier 1 common capital ratio, which compares high-quality capital to risk-weighted assets, would fall from an actual 11.9% in the third quarter of 2014 to a minimum level of 8.2% in the hypothetical stress scenario. This hypothetical post-stress minimum is significantly higher than the 31 firms' aggregate tier 1 common capital ratio of 5.5% measured in the beginning of 2009.

This is the fifth round of stress tests led by the Federal Reserve since 2009 and the third round required by the Dodd-Frank Act. The 31 firms tested represent more than 80% of domestic banking assets. The Federal Reserve uses its own independent projections of losses and incomes for each firm.

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