Four of 19 banks failed to meet at least one of the minimum capital ratios in the Federal Reserve‘s stress tests.
The Fed was forced to release the results of its latest bank stress tests Tuesday. They were originally scheduled for release on Thursday, but some participating banks leaked beforehand that they had passed.
In response to the results, Citigroup pointed out that it exceeded the stress test requirements without the capital actions Citi proposed. However, the Fed objected to Citi’s proposed return of capital to shareholders. In light of the Fed’s ruling, Citi said it will submit a revised capital plan later this year.
“We plan to engage further with the Federal Reserve to understand their new stress loss models,” Citi said in a statement.
The stress test is just one component of the central bank’s evaluation of a bank holding company’s proposal to make capital distributions. Other considerations include the strength of the firm’s capital planning processes and plans to meet international capital agreements as new requirements are phased in beginning in 2013.
The scenario projections suggest that the 19 holding companies as a group would experience significant losses under the assumptions of the stress scenario. The analysis resulted in $534 billion in projected losses for the companies over the nine quarters of the stress scenario horizon.
Despite the projected capital declines, 15 of the 19 bank holding companies were estimated to maintain capital ratios above all four of the regulatory minimum levels under the stress scenario, even after considering capital actions such as as dividend increases and share buybacks.
In November, the Federal Reserve issued its final rule requiring all U.S.-based, top-tier bank holding companies with assets of at least $50 billion to develop and submit capital plans to the central bank on an annual basis. The rule was enacted to ensure that institutions have sufficient capital to survive economic and financial stress.
Under the hypothetical trajectories, gross domestic product contracts sharply through late 2012, with the unemployment rate reaching a peak of just above 13% in mid-2013. U.S. equity prices fall by 50% from their third quarter 2011 values through late 2012 and home prices fall by more than 20% through the end of 2013.
The four ratios included in the test are Tier 1 common capital, Tier 1 capital, total risk-based capital and Tier 1 leverage.
Strong capital levels are critical to ensuring that banks have the ability to lend and to continue to meet financial obligations, even in times of economic difficulty, the Fed said in a statement.