Bank of America and Wells Fargo would have enough capital to weather a hypothetical severe recession, the Federal Reserve said Thursday in releasing the results of its annual stress tests.
The results are part of annual reviews that are a key tool in the Fed’s efforts to prevent a repeat of the 2008 financial crisis. The exams run banks through hypothetical downturn scenarios to see whether their capital levels would remain high enough for the firms to continue lending in times of financial and economic stress.
While the Fed does not issue passing or failing grades, poor performance on the closely watched exams could be embarrassing for a bank. The regulator’s findings allow comparisons of banks on other measures, such as declines in profit.
Charlotte-based Bank of America and San Francisco-based Wells Fargo, Charlotte’s two largest banks by deposits, exceeded the Fed’s capital minimums across four measurements. All other banks tested also surpassed the minimums.
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Under the Fed’s “severely adverse” economic scenario, Bank of America’s common equity tier one capital ratio was 8.1 percent, exceeding the Fed’s 4.5 percent minimum. The ratio measures high-quality capital against total risk-weighted assets.
Bank of America’s tier one leverage ratio was 6.4 percent, above a 4 percent minimum. The ratio shows high-quality capital as a percentage of a bank’s total assets.
Wells Fargo’s common equity tier one capital ratio was 7.2 percent. It’s tier 1 leverage ratio was 6.6 percent.
The regulator’s drills also found 33 of the largest U.S. banks would post $385 billion in combined loan losses during nine quarters, under the regulator’s most extreme downturn scenario. Bank of America, the second-largest U.S. bank by assets, was projected to suffer the most losses at $53.7 billion.
At JPMorgan Chase, the second-largest bank, the Fed calculated losses of $53.4 billion.
Thursday’s findings are the first of back-to-back reports the Fed will release on large banks this month.
For shareholders, the results of exams to be released next week will have direct consequences for their pocketbooks. On Wednesday, the Fed will disclose whether it has greenlighted big banks’ plans to raise dividends or buy back additional shares. Banks had an April deadline to submit those plans to the regulator.
Bank of America investors, especially, will be paying close attention to those results. That’s because the bank continues to pay a common-stock dividend of 5 cents a quarter, well below the 64 cents it paid as recently as 2008 and less than some of its big-bank peers.
It’s not clear what might be in Bank of America’s and Wells Fargo’s latest capital-return plans. The companies normally do not disclose specifics about requests pending before the Fed.
Thursday morning, the Fed privately told banks how their capital levels would fare under their planned increases in dividends and buybacks. Senior Fed officials said Thursday that banks have until Saturday to resubmit their plans – a move that could result in a bank decreasing the capital it initially planned to return in order to meet regulatory capital minimums.
Bank of America is under pressure to meet Fed requirements because it has stumbled in the test in three of the past five years. The Charlotte bank, as well as Citigroup and BB&T, could see the biggest increases in capital returns, according to a report by Sanford C. Bernstein analysts.