Wells Fargo, one of the largest banks serving the Twin Cities area, was among the big banks to undergo the Fed’s latest stress test.
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Fed stress tests show biggest banks could survive deep recession
- Article by: Jim Puzzanghera
- Los Angeles Times
- March 7, 2013 - 8:14 PM
WASHINGTON – All but one of the nation’s largest banks could withstand a severe recession, and the industry’s biggest players are much better positioned to blunt economic shocks than before the financial crisis, according to results of the latest Federal Reserve stress tests.
Ally Financial Inc. in Detroit, the only large bank still majority-owned by the government after the recession-era industry bailouts, would be at risk of failure under the Fed’s scenario. But none of the 17 other major banking firms would be near collapse if the economy tanked, according to the results released Thursday.
“This is just a confirmation that the industry has largely recovered from its problems,” said Bert Ely, an independent banking analyst.
Among the banks were Wells Fargo & Co. and Minneapolis-based U.S. Bancorp, the two banks that dominate the Twin Cities market.
Fed officials emphasized that banks could not pass or fail this set of stress tests because it did not take into account some important factors, such as their plans for issuing dividends.
Next week, the Fed will give what amounts to a pass/fail grade for the banks based on that additional information.
“The stress tests are a tool to gauge the resiliency of the financial sector,” said the Fed’s Daniel Tarullo, who is in charge of the central bank’s regulatory functions.
“Significant increases in both the quality and quantity of bank capital during the past four years help ensure that banks can continue to lend to consumers and businesses, even in times of economic difficulty,” he said.
The Fed tested how each bank’s financial condition would be hurt under a worst-case scenario that envisions a severe recession deeper than the Great Recession.
At the lowest point in the severe-recession scenario, Ally would fall well below a key Fed measure of bank health. That gauge — the ratio of a bank’s capital to its risk-weighted assets — would drop to 1.5 percent for Ally at its lowest point in the scenario. Banks are supposed to stay above 5 percent.
Ally said Thursday the stress test was “fundamentally flawed” and included projections for losses on auto financing that were “implausible, even in dire economic situations.”
For each of the other large banks, that ratio would remain above 5 percent. Taken together, the firms, which account for 70 percent of all U.S. banking assets, would have an average capital-to-assets ratio of 7.4 percent at their lowest point in the Fed’s “severely adverse” two-year economic scenario.
As of Sept. 30, the banks’ combined ratio was 11.1 percent. At the end of 2008, in the midst of the financial crisis, it was about 5 percent, Fed officials said.
© 2013 Star Tribune