Bank of America, Wells Fargo and the nation’s other biggest banks have enough capital on hand to weather another severe recession, the Federal Reserve said Thursday in releasing its latest “stress tests” results.
The annual exams, required under the 2010 Dodd-Frank financial overhaul law, measure whether the 34 bank holding companies possess enough capital to absorb losses and continue lending in periods of stress. The reviews are a key tool in the Fed’s efforts to prevent a repeat of the 2008 financial crisis and instill public confidence in the resiliency of the financial system.
“This year’s results show that, even during a severe recession, our large banks would remain well capitalized,” Federal Reserve governor Jerome Powell said in a statement. “This would allow them to lend throughout the economic cycle and support households and businesses when times are tough.”
In its most severe scenario, the Fed measured how capital, loan losses and other areas at the companies would fare in a global recession in which U.S. unemployment rises to 10 percent and home prices slide by 25 percent. Combined loan losses at the companies would hit $383 billion over a nine-quarter period ending in the first quarter of 2019, the Fed said.
Thursday’s results represent the first part of the two-part testing process. Much more will be at stake for investors when the results of part two are announced next Wednesday.
In Wednesday’s tests, the Fed will say whether it objects to banks’ proposed plans to return additional capital to shareholders, such as through buying back stock or boosting dividends. Banks were required to submit those plans to the Fed by April 5.
Next week, banks must meet minimum capital levels or the Fed could object to their capital plans. For example, banks must have at least a 4.5 percent ratio of common equity tier 1 capital to risk-weighted assets.
Thursday’s report, which doesn’t take into account capital plans, puts Charlotte-based Bank of America’s common equity tier 1 ratio at 8.9 percent, Winston-Salem-based BB&T’s at 7.9 percent and San Francisco-based Wells Fargo’s at 8.6 percent under the Fed’s most-severe downturn scenario. The three banks are the largest in the Charlotte market by deposits.
This year, Wells Fargo’s results are under extra scrutiny, as investors wait to see whether the bank’s sales scandal that erupted in September could have an impact on its stress test results. On Sept. 8, Wells agreed to pay $185 million in fines to resolve allegations that its employees, striving to meet aggressive sales goals, opened millions of accounts that customers may not have authorized for years.
Investors also want to see whether Wells Fargo’s problems with its “living will” might affect its stress test performance. Regulators require big banks to draft the wills to show how they would be dismantled in a failure without relying on taxpayer bailouts.
In December, federal regulators slapped Wells with sanctions for failing to fix deficiencies in its will – making Wells the first bank to have regulators impose penalties on it for living will shortcomings. In April, regulators announced that Wells had fixed the deficiencies.
Wells Fargo has never stumbled on the stress tests in the past, although Bank of America and New York-based Citigroup have had issues multiple times.
Stress tests have drawn criticism from bankers and others who have sought more transparency about the Fed’s process. Speaking to reporters on a conference call Thursday, Fed officials said the tests have contributed to a safe and sound banking system.