Weekend Economists: Spock Lives! March 6-8, 2015

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14. Fed Says 31 U.S. Banks Could Weather an Economic Storm

AND IT'S RAINBOWS AND PONIES, ALL AROUND!

http://www.bloomberg.com/news/articles/2015-03-05/fed-stress-tests-show-31-largest-banks-meet-capital-targets



The Federal Reserve said all 31 big banks subjected to a stress test have sufficient capital to absorb losses during a sharp and prolonged economic downturn. It’s the first time since the central bank started stress tests in 2009 that no firm fell below any of the main capital thresholds. Goldman Sachs Group Inc. surpassed the 8 percent minimum for total risk-based capital by 0.1 percentage point, potentially restricting its room to return capital to shareholders. The annual tests, using hypothetical scenarios that are not forecasts, are the cornerstone of the Fed’s efforts to prevent a repeat of the 2008 financial crisis and to gauge the ability of banks to withstand economic turmoil.

The largest U.S.-based banks “continue to build their capital levels and to strengthen their ability to lend to households and businesses during a period marked by severe recession and financial market volatility,” the Fed said in a statement Thursday. The Fed uses the exams to prod lenders into building up capital buffers. Banks that don’t meet a second round of tests released next week may face restrictions in buying back stock and paying dividends.

This year’s results are being released as the Fed faces scrutiny from lawmakers critical of its supervision of the biggest banks. Fed Chair Janet Yellen countered the criticism, saying this week the central bank works hard to avoid the trap of “regulatory capture,” or the risk that bank examiners get too cozy with the firms they oversee.

Six Largest

Bank of America Corp. was the only bank among the six largest to improve in every capital measure from its performance in last year’s test. Wells Fargo & Co. surpassed every minimum by at least 2 percentage points. Morgan Stanley’s ratio in three capital measures fell in a severely adverse scenario to within 1 percentage point of the required minimum. Loan-loss estimates for the 31 banks totaled $490 billion under a hypothetical severely adverse scenario, down from $501 billion for the 30 banks tested last year. The losses include a $102.7 billion hit to trading. JPMorgan Chase & Co. would suffer the most from trading losses, estimated at $23.6 billion. The heaviest damage was to consumer lending, with 39 percent of projected losses from such activity as mortgages and credit cards. Goldman Sachs’s small buffer over the required minimum would appear to leave the firm with less than $1 billion in excess capital to pay out to shareholders. In 2014, the bank returned $6.52 billion in dividends and share repurchases.

Citigroup Losses

Citigroup Inc. lost the most among banks in an accounting line known as accumulated other comprehensive income, which measures losses that can erode equity, even if they aren’t immediately reflected in the firm’s net income. The New York-based bank’s losses in that category were estimated to reach $20.5 billion, or about three quarters of the industry’s total, under the severely adverse economic scenario. Under the less severe scenario, the bank’s $29.3 billion in losses accounted for about one third of the total. The Fed didn’t specify what part of Citigroup’s business fueled the loss estimate. Accounting rules require banks to record unrealized gains and losses from items such as “available-for-sale” security holdings and foreign-currency moves under that line item.

Adverse Scenario AND MORE, AT LINK