Odds are, your bank could survive a pretty nasty economic downturn.
That's the takeaway from the latest Federal Reserve stress tests of the world's biggest, most "systemically important" banks. The tests go by the catchy name of Comprehensive Capital Analysis and Review, or CCAR, and are designed to determine both the amount of capital the banks have to cushion them against losses and their plans for managing that capital.
The Fed's quantitative tests ran the banks through a "severely adverse" scenario involving unemployment rising to 10%, stock prices falling by about half, and house prices dropping 25%, and then checked to see how much quality capital they had left afterward. The goal was for every bank to finish with a 5% capital ratio, and Bank of America, JPMorgan Chase, Citi, Wells Fargo and all the other American banks in the test did (M&T Bank had to retake the test once after changing up their capital plan).
There was a qualitative component as well, where the Fed combed through the banks' capital plans looking for weaknesses. Two foreign-owned banks, Santander of Spain and Deutsche Bank of Germany, failed that portion of the test, Deutsche Bank for the second time in a row and Santander for the third. Those banks will not be able to make capital distributions such as dividends without the approval of the Fed. The Fed is also requiring Morgan Stanley to submit a new capital plan.
Other than that, the news was generally good. The Fed said that a key ratio it uses to measure banks' capital reserves has doubled since the beginning of 2009, with an additional $700 billion of common equity capital added among the 33 systemically important banks.
What do you think? Could American banks weather a Great Recession better this time around?
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