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Largest bank holding companies in U.S. pass 1st round of stress tests

By on June 25, 2018

SAN JUAN – The largest bank holding companies in the United States are well-capitalized and would be able to continue lending during a severe global recession, according to the results of supervisory stress tests released by the Federal Reserve Board.

Among those tested were Santander Holdings USA Inc., which has Banco Santander branches in Puerto Rico, and Bank of America Corp., Citigroup, UBS Americas Holding and others with offices on the island.

The most severe hypothetical scenario projects $578 billion in total losses for the 35 participating bank holding companies during the nine quarters tested. The “severely adverse” scenario, the toughest in the Fed’s stress tests, is of a severe global recession with the U.S. unemployment rate rising by almost 6 percentage points to 10 percent, accompanied by a “steepening Treasury yield curve.”

“The firms’ aggregate common equity tier 1 capital ratio, which compares high-quality capital to risk-weighted assets, would fall from an actual level of 12.3 percent in the fourth quarter of 2017 to a minimum level of 7.9 percent in the hypothetical stress scenario. Since 2009, the 35 firms have added about $800 billion in common equity capital,” a release reads.

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Vice Chairman Randal Quarles added that “Despite a tough scenario and other factors that affected this year’s test, the capital levels of the firms after the hypothetical severe global recession are higher than the actual capital levels of large banks in the years leading up to the most recent recession.”

Several factors affected post-stress test capital ratios, the Fed board said.

“Credit card balances are generally higher, producing increased losses under stress, totaling $113 billion this year. Additionally, recent changes to the tax code affected the firms and the effects were different across the firms. Several firms had immediate, one-time declines in their starting capital ratios because of certain accounting consequences of the tax changes. The tax law also eliminated some beneficial tax treatments that tended to raise post-tax income in times of stress.”

Explaining that capital is essential for “banking organizations, the financial system, and the economy,” because it can “absorb losses and helps to ensure that losses are borne by shareholders,” the board said its stress scenarios are deliberately stringent, but the results are not forecasts or expected outcomes.

This is the eighth round of stress tests by the Fed since 2009 and the sixth round required by the Dodd–Frank Wall Street Reform and Consumer Protection Act enacted by President Obama in 2010 in the aftermath of the 2008 financial crisis.

The 35 firms tested this year represent about 80 percent of the assets of all banks operating in the U.S. The Fed uses its own independent projections of losses and incomes for each firm.

The recently passed Economic Growth, Regulatory Reform and Consumer Protection Act no longer requires bank holding companies with less than $100 billion in consolidated assets to stress testing, including both the Dodd-Frank Act stress tests and CCAR, leaving out CIT Group Inc., Comerica Inc. and Zions Bancorporation from this year’s results.

The board said it “will have further information on its implementation of the new law at a later date.”

See the test results here.

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