Congrats America! The 33 biggest banks in the US are getting safer
REUTERS/Kevin Coombs
The tests, conducted since 2009 and mandated by the Dodd-Frank Act since 2011, attempt to determine just how safe financial institutions with more than $50 billion in US-based assets are.
The Fed runs a hypothetical test of a recession and severe recession and models the impact of the downturn on the banks' balance sheets. In the current modeling, the severe recession would include unemployment of 10%, a decline in home prices of 25%, and a stock market drop of roughly 60%.
In this scenario, the Fed said the 33 institutions would lose $385 million on loans they have outstanding.
Additionally, the Fed looks at the ratio of capital that the institutions hold against their risky assets, called the Tier 1 common capital ratio. The lower the ratio, the more worrisome the institutions' financial situation. The institutions' ratio stands at 12.3% as of the fourth quarter of 2015. Under the severe recession scenario, that ratio would be 8.4%. This ratio was just 5.5% at the start of 2009.
For reference, anything above 6% is considered "well-capitalized", between 4% and 6% is "adequately capitalized", under 4% is under-capitalized, and under 3% and 2% are considered significantly and critically under-capitalized respectively. Those firms with undercapitalized rankings or below are not allowed to return cash to shareholders through dividends or buybacks.
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