The results of the stress tests mandated by the Dodd-Frank financial overhaul law noted that the nation’s largest banking holding companies’ health has substantially improved and most could survive a severe recession and crash in the markets.
The stress test provides a critical analysis into the financial system nearly five years after the banking companies almost collapsed.
Many regulators are pleased with improvements of the banks including Daniel Tarullo, Federal Reserve governor who noted that the stress tests are a tool to gauge the resiliency of the financial sector.
"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 added.
The nation’s largest bank holding companies have continued to improve their ability to withstand the extremely adverse hypothetic scenario mapped out by the stress test, which noted that 17 out of the 18 banks are in a much stronger capital position than before the financial crisis, according to the Federal Reserve.
Ally Financial (GMA) was the only bank to fall below the 5% Tier 1 common ratio, according to data released.
The lending giant was not pleased with the stress test results and noted in a release that the Fed’s analysis of Ally’s capital adequacy is "fundamentally flawed."
"While Ally appreciates the Fed’s role in ensuring that financial institutions have adequate capital during stressed situations, using flawed assumptions could have lasting adverse impacts on the economy, including ultimately causing banks to reduce certain key lending categories," the company said.
Moreover, Ally said that if the Fed has significant concerns about the company’s capital adquency, the central bank can immediate initiate "a conversion of approximately $5.9 billion of existing capital that can be fully converted into Tier 1 common equity at their discretion."
Projected losses for the 18 banks under a scenario of deep recession and unemployment of 12.1% and a decline in housing prices of more than 20% would total $462 billion over nine quarters, the Fed noted.
The aggregate Tier 1 common capital ratio would fall from an actual 11.1% in the third quarter of 2012 to 7.7% in the fourth quarter of 2014.
The big banking giants came in modestly with JPMorgan Chase’s (JPM) Tier 1 common capital ratio of 6.3% and Bank of America with 6.8%.
Additionally, projected net revenue before provisions for loan and lease losses at the 18 largest bank holding companies over the nine quarters of the severe scenario is $268 billion, which is net of losses related to operational-risk events and mortgage repurchases, as well as expenses related to disposition of owned real estate of $101 billion, the report stated.
"As with the accrual loan portfolio, loss projections for different categories of securities are made based on obligor, collateral or underlying cash flow, and security structure. These categories include various types of securitized obligations (e.g., commercial and residential mortgage-backed securities), corporate bonds, municipal bonds, and sovereign bonds," according to the Fed.