Fed stress test aced by most US lenders
But Citigroup fail ‘shocks’
MOST of the largest US banks had passed their annual stress test, the Federal Reserve said on Tuesday, in a conservative report card that underscored the recovery of the financial sector but called out a few laggards, including Citigroup.
The Fed announced the results in an earlier-than-expected release on Tuesday. Jpmorgan Chase pulled the trigger on announcing its own glowing marks before the Fed’s release, and helped lift the stock market.
But the failing grade for Citigroup, the nation’s thirdlargest bank, was a shock. Going into the tests some analysts felt it had a better chance of a positive surprise than any other financial institution.
The Fed said on Tuesday that 15 of the 19 banks tested would have enough capital, even if the economy suffered a shock that would see unemployment hit 13 percent and housing prices drop 21 percent.
The results paved the way for many of the passing banks to announce highly anticipated plans to boost dividends and buy back stock.
The outcome showed a middle-of-the-road approach. The Fed failed enough banks to give the tests credibility and to elicit industry outcries about the tests being too tough, but it reassured markets that US banking was generally healthy.
“Overall, we can’t complain that these tests weren’t rigorous enough, and it’s good to know that most banks would at least survive another global financial meltdown,” said Paul Ashworth, a chief economist at Capital Economics in Toronto.
Metlife, the largest life insurer in the US, was among the four financial institutions that failed the exam, which applied worst-case stress scenarios until the end of 2013.
Ally Financial and SunTrust also came up short.
Among the winners was Jpmorgan, which has been agitating for regulators to loosen the handcuffs on the ability of banks to raise dividends and buy back stock.
The annual stress tests give the markets a window into the health of the US bank industry, and also determine if individual banks are strong enough to reduce their capital buffers.
Bank of America, the nation’s second-largest bank, passed the Fed’s test, but it did not ask for a dividend increase or to buy back shares. Last year, the Fed rejected the bank’s request for a dividend hike, in a major embarrassment for chief executive Brian Moynihan.
Jpmorgan, in a surprise to markets, announced at 3pm in New York on Tuesday that the Fed had given it the nod to raise its dividend by 20 percent and spend up to $12 billion (R90bn) buying back stock this year. The news lifted the US stock market to its best day this year.
The Fed had been scheduled to release the test results after markets shut today. A person close to the situation, who was not authorised to speak on the record, said the Fed quietly shifted the release to 4.30pm on Tuesday after leaks about the tests came out late on Monday.
The person said that at noon on Tuesday, there was a miscommunication between Jpmorgan and the Fed over the hour of Jpmorgan’s own release.
A senior Fed official told reporters that the timing of JPMorgan’s announcement was the result of less-than-perfect communication, and that nobody at Jpmorgan was at fault.
Regarding the outcome of the tests, the official said the capital positions of US banks had improved substantially in the past three years.
US regulators first ran a stress test in 2009 in a bid to show markets during the financial crisis that banks’ balance sheets were stable.
The Fed took a tough line with the banks this year, and in some instances, the central bank’s estimates of banks’ losses under the hypothetical financial shock were larger than the firms’ own.
Frank Keating, the president of the American Bankers Association, said the industry objected to stress tests under theoretical conditions that were worse than what occurred during the financial crisis.
“It unjustifiably prohibits some institutions from paying dividends to shareholders and could potentially impair their ability to raise capital and make loans. That is an unnecessary and ill-timed consequence of these stress tests given the essential role of banks in our still-recovering economy,” Keating said.
Citigroup did not dispute the Fed’s decision and said it would submit a revised capital proposal later this year. Some analysts had expected Citigroup to win permission to raise its dividend to as much as 10c from a penny a share.
In one sign of its weakness, Citigroup had the second-highest total loan loss rate under the stress scenario, behind Capital One, the Fed said. – Reuters