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Mar 17

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4 Banks Fail the Stress Test

The Federal Reserve just released their annual stress test results for the 19 largest U.S. banks.  The stress test came as a result of the 2008 US financial crisis.  The test looks at the financial health of each bank and tests if it would be able to withstand a scenario where (i) the U.S. economy would have a peak unemployment rate of 13%, (ii) there would be a 50% decrease in equity prices, and (iii) housing would drop 21%.  Banks must have a common capital ratio of greater than 5% and insurance companies should have one greater than 8% under the test scenario.  Any institution with a ratio under the minimum would not have sufficient reserves to withstand a financial shock similar to the test conditions.  The following table summarizes the common capital ratios for the 19 banks tested by the Federal Reserve:

Institution

Common Capital Ratio

Ally Financial

2.5%

Sun Trust Banks, Inc.

4.8%

Citigroup Inc

4.9%

MetLife, Inc.

5.1%

Keycorp

5.3%

U.S. Bancorp

5.4%

Morgan Stanley

5.4%

J.P. Morgan Chase

5.4%

Goldman Sachs

5.7%

Bank of America Corporation

5.9%

PNC

5.9%

Wells Fargo & Company

6.0%

Fifth Third Bancorp

6.3%

BB&T Corporation

6.4%

Regions Financial

6.6%

Capital One Financial

7.8%

American Express Company

10.8%

State Street Corporation

12.5%

Bank of New York Mellon

13%

MetLife is an insurance company, and therefore, subject to the 8% minimum ratio.  Based on the Federal Reserve’s stress tests, Ally Financial, Sun Trust Banks, Inc., Citigroup Inc, and MetLife, Inc. all fail.  There is no need to panic yet if you bank at one of these 4 institutions.  Each depositor is insured up to $250,000 by the FDIC.  These banks will have to improve their ratios in the near future.  Otherwise the Federal Reserve will have to step in and enforce various actions.

About the author

Anand Khemlani

I am a founding member of Fulcrum Inquiry, an accounting and economic consulting firm that performs damage analysis for commercial litigation, forensic accountings, financial investigations, and business valuations. I am a Certified Public Accountant (CPA), Accredited in Business Valuation (ABV), a Certified Fraud Examiner (CFE) and am a licensed Real Estate Broker. I regularly serve as an expert witness involving results of my forensic accounting assignments and damage analyses. My resume is available on Fulcrum's website

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