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Fed’s Stress Test Shows 15 out of 19 Banks Would Weather Storms

If extremely severe economic conditions were to fall upon the U.S., 15 of the 19 banks tested by the Fed's stress scenario projections are said to be able to survive and continue to lend.

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The hypothetical stressful scenario included a 13 percent unemployment rate, 50 percent decline in equity prices, and a 20 percent decline in home prices.

In its ""report"":http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20120313a1.pdf, the Fed said the purpose of requiring bank holding companies to develop and maintain capital plans is to ensure these institutions have adequate capital to continue operations throughout times of financial stress.

The Fed released results Tuesday, even though it had planned to do so on Thursday since certain banks leaked the news that they passed.

""Those leaks prompted a big late-day rally in bank stocks and it looks like a number of banks will be increasing dividends and announcing equity buy backs,"" said Capital Economics in a response.

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The scenario covers nine quarters into the fourth quarter of 2013, and the four banks that failed - Ally Financial, Citigroup, SunTrust, and MetLife - were said to have one or more projected regulatory capital ratios that fell below the 5 percent minimum levels at some point over the stress scenario horizon, according to the Fed.

When analyzing the data based on only Tier 1 common capital ratios, 3 of the 19 banks fell below 5 percent, with MetLife barely above the benchmark at 5.1 percent.

In the response authored by Paul Ashworth, chief U.S. economist for Capital Economics, it was noted that MetLife also appears to have failed, but only because of the alternative total risk-based capital ratio measure.

Citigroup's Tier 1 common capital ratio was at 4.9 percent, SunTrust 4.8 percent, and Ally at 2.5 percent.

While Ally's failure seems significant in comparison to the others, Capital Economics stated that it is one of the smaller banks examined and holds a balance sheet less than a tenth of the size of the big three.

""After its near collapse during the financial crisis, it also happens to be 73.7% owned by the US Treasury, so there's little chance it would ever be allowed to fail,"" the research firm stated.

The 15 banks that were included in the study and passed were American Express Company, Bank of America, The Bank of New York Mellon, BB&T, Capital One, Fifth Third Bancorp, The Goldman Sachs Group, JPMorgan Chase, Keycorp, Morgan Stanley, The PNC Financial Services Group, Regions Financial, State Street, U.S. Bancorp, and Wells Fargo.

About Author: Esther Cho

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