Under a hypothetical downturn that would affect the U.S. and global markets, Bank of America could incur $26.1 billion in losses over nine quarters but its capital levels would exceed regulator requirements, the bank said Monday.
The estimates were released as part of the so-called mid-cycle stress tests that the biggest U.S. banks must conduct. The exams are required under the Dodd-Frank financial reform law. Other major banks, including Wells Fargo, also released results Monday.
Charlotte-based Bank of America, the second-largest U.S. bank by assets, said its Tier 1 common capital ratio – a measure of a bank’s buffer against losses – could drop to as low as 8.4 percent in the hypothetical “severely adverse” scenario. That’s above the minimum of 5 percent required by regulators.
The bank’s other projected capital ratios would also top the minimums required by U.S. regulators.
San Francisco-based Wells Fargo also said that its capital ratios would remain above required minimums over nine quarters. It said its Tier 1 common ratio could dip to as low as 9.9 percent.
In March, Bank of America, Wells Fargo and nearly all the rest of the nation’s largest banks passed separate stress tests conducted by the Federal Reserve and required since the financial crisis. The tests are meant to check whether the banks would be able to withstand another substantial economic downturn.
The Fed’s tests assumed an unemployment rate peaking at 12 percent, home prices plummeting 20 percent and real gross domestic product declines of nearly 5 percent. The Fed’s hypothetical “severely adverse scenario” lasted nine quarters, until the fourth quarter of 2014.
In the self-tests Bank of America and Wells reported Monday, they estimated higher minimum capital ratios over a nine-quarter period than what the Fed projected in March.
This is the first year that big banks been required to test themselves in the middle of the year. In the self-tests, the banks are allowed to craft their own scenarios to gauge how they’d fare.
Bank of America said its scenario was based on the U.S. economy “falling into a deep six-quarter recession followed by a sluggish recovery and accompanied by a global recession.” Its scenario assumes U.S. real gross domestic product falling 4 percent and the country’s unemployment rate rising to 11.7 percent – higher than the 10 percent in October 2009, the downturn’s peak.
Bank of America estimated it would have pre-provision net revenue of $45.9 billion over a period from the end of March 2013 to the end of June 2015. The bank projected $36.8 billion in loan losses during that period, with the largest single source being credit cards, at $14.2 billion. First-lien mortgages would account for the next-largest amount, $7.1 billion.
Wells, the fourth-largest U.S. bank by assets, estimated it would have pre-provision net revenue of $52.6 billion. It estimated a net loss of $3.8 billion. It projected its loan losses could hit $29.7 billion. The largest dollar amount of loan losses, at $6.8 billion, would be in home-equity loans.
Citigroup, the third-largest U.S. bank by assets, released test results Monday, estimating $21.2 billion in losses over nine quarters.
Bank of America shares climbed .28 percent to $14.53 on Monday.
Staff writer Andrew Dunn contributed.
Roberts: 704-358-5248; Twitter: @DeonERoberts
The Charlotte Observer welcomes your comments on news of the day. The more voices engaged in conversation, the better for us all, but do keep it civil. Please refrain from profanity, obscenity, spam, name-calling or attacking others for their views.
Have a news tip? You can send it to a local news editor; email firstname.lastname@example.org to send us your tip - or - consider joining the Public Insight Network and become a source for The Charlotte Observer.Read moreRead less