The Federal Reserve is finally out with its results of the bank stress tests. This is not the formal decision that will allow all the banks to increase their dividends and share buybacks. Seventeen of the eighteen largest banks passed the test, with Ally Financial as the only failure under a 5% capital ratio and under new theoretical adverse conditions.
The adverse scenario was a moderate U.S. recession that would have begun in the fourth quarter of 2012 and lasts until early 2014. In this period, real GDP would fall by 2%, unemployment would jump up to 9.75%, CPI would reach 4% by the middle of 2013, and equity prices would fall by 25% by the middle of 2013. The VIX (volatility index) would also rise to more than 40 at the start of the scenario, housing prices would drop more than 6% during 2013, and commercial real estate prices would fall by 4.5% during 2013.
The Federal Reserve said that the nation’s largest banks have continued to improve their ability to withstand an extremely adverse hypothetical economic scenario and are now in a much stronger capital position than before the financial crisis.
We expect that Bank of America Corp. (NYSE: BAC), Citigroup Inc. (NYSE: C), SunTrust Banks Inc. (NYSE: STI), U.S. Bancorp (NYSE: USB), KeyCorp (NYSE: KEY), J.P. Morgan Chase & Co. (NYSE: JPM), Bank of New York Mellon Corp. (NYSE: BK) PNC Financial Services Group Inc. (NYSE: PNC) and others will all have sought to request higher dividends and to resume share buybacks.