WASHINGTON, DC-Depending on how you look at the results, the Federal Reserve’s release Tuesday of its annual stress test on the leading 19 US banks either shows safeguards put in place since the economic downturn are working, or the government is being far too stringent in its methodology. The latter claim comes from the four banks – New York City-based Citi and MetLife, Atlanta-based SunTrust, Detroit-based Ally Financial – that were deemed by the Fed to have failed the Comprehensive Capital Analysis and Review test.
Granted, the Fed said in a statement that the stress test scenario estimates “are the outcome of deliberately stringent and conservative estimates under hypothetical, adverse conditions.” The scenario, enacted to see if the banks could handle another crash in the market, included a peak unemployment rate of 13%, a 50% drop in equity prices and a 21% decline in housing prices.
The Federal Reserve statement seemed to reflect approval of the results, adding that the 19 banks that participated increased tier one common capital levels to $759 billion in the fourth quarter, compared to $420 billion in Q4 2009, the year the CCAR started. “Strong capital levels are critical to ensuring that banking organizations have the ability to lend and to continue to meet their financial obligations, even in times of economic difficulty,” the Fed said.
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Many of banks that passed the test, including JPMorgan Chase, U.S. Bancorp, BB&T and Wells Fargo, touted the results, and announced plans to pay increased dividends and increased schedules on stock buyback from federal debt. Jamie Dimon, chairman and CEO at JPMorgan, said the company is pleased with the results. “JPMorgan Chase continues to invest in our substantial organic growth opportunities as our top priority and best use of capital,” Dimon said in a statement. “We expect to repurchase, at a minimum, approximately the same amount of shares that we issue for employee stock-based incentive awards. Beyond this, we intend to repurchase equity only when we are generating capital in excess of what we need to fund our organic growth and when we think it provides excellent value to our existing shareholders."
The four failed banks, in separate statements Tuesday, disputed the test results as being too stringent, unfairly weighted and/or not considerate of capital reserves. The banks said they will resubmit revised capital plans to the Fed, and will try to understand better the stress models, though they protested that they meet strict standards of safety. “Using our own modeling techniques – which have shown to have a high level of predictability – SunTrust’s estimates for loan losses and pre-provision net revenue in the Supervisory Stress scenario are significantly more favorable than those made by the Federal Reserve,” said Aleem Gillani, CFO for the company.
MetLife chairman, president and CEO Steven Kandarian said in a statement that the company should be considered differently. “We are deeply disappointed with the Federal Reserve’s announcement,” he said. “We do not believe that the bank-centric methodologies used under the CCAR are appropriate for insurance companies, which operate under a different business model than banks.”
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