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Press Release
March 13, 2012

Federal Reserve announces summary results of
latest round of bank stress tests
For immediate release
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The Federal Reserve on Tuesday announced summary results of the
latest round of bank stress tests, which show that the majority of the
largest U.S. banks would continue to meet supervisory expectations for
capital adequacy despite large projected losses in an extremely adverse
hypothetical economic scenario.
The Federal Reserve in the Comprehensive Capital Analysis and
Review (CCAR) evaluates the capital planning processes and capital
adequacy of the largest bank holding companies. This exercise includes
a supervisory stress test to evaluate whether firms would have sufficient
capital in times of severe economic and financial stress to continue to
lend to households and businesses.
Reflecting the severity of the stress scenario--which includes a peak
unemployment rate of 13 percent, a 50 percent drop in equity prices,
and a 21 percent decline in housing prices--losses at the 19 bank
holding companies are estimated to total $534 billion during the nine
quarters of the hypothetical stress scenario. The aggregate tier 1
common capital ratio, which compares high-quality capital to riskweighted assets, falls from 10.1 percent in the third quarter of 2011 to
6.3 percent in the fourth quarter of 2013 in the hypothetical stress
scenario. That number incorporates the firms' proposals for planned
capital actions such as dividends, share buybacks, and share issuance.

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Despite the large hypothetical declines, the post-stress capital level in
the test exceeds the actual aggregate tier 1 common ratio for the 19
firms prior to the government stress tests conducted in the midst of the
financial crisis in early 2009, and reflects a significant increase in capital
during the past three years. In fact, despite the significant projected
capital declines, 15 of the 19 bank holding companies were estimated to
maintain capital ratios above all four of the regulatory minimum levels
under the hypothetical stress scenario, even after considering the
proposed capital actions, such as dividend increases or share
buybacks.1
It's important to note that the Federal Reserve's stress scenario
estimates are the outcome of deliberately stringent and conservative
assessments under hypothetical, adverse economic conditions and the
results are not forecasts or expected outcomes.
Strong capital levels are critical to ensuring that banking organizations
have the ability to lend and to continue to meet their financial
obligations, even in times of economic difficulty. U.S. firms have built up
their capital levels under the Federal Reserve's leadership since the
government stress tests in 2009. The 19 bank holding companies that
participated in those tests and in the 2011 and 2012 CCAR have
increased their tier 1 common capital levels to $759 billion in the fourth
quarter of 2011 from $420 billion in the first quarter of 2009. The tier 1
common ratio for these firms, which compares high-quality capital to
risk-weighted assets, has increased to a weighted average of 10.4
percent from 5.4 percent.
The stronger capital position reflects in part substantially lower capital
distributions by bank holding companies, a result of the Federal
Reserve's move to ensure the firms reduced or eliminated dividends to
maintain safety and soundness. Following the first CCAR in 2011, the
Federal Reserve allowed those financial institutions with well-developed
capital plans and capital positions that would remain strong even under
adverse conditions to increase distributions, but at a prudent pace that
would ensure continued increases in capital. The 19 institutions paid out
15 percent of net income in common dividends in 2011 compared with a
payout of 38 percent of net income in 2006. They also raised more in
common equity than they repurchased in 2011.
The stress test is just one component of the Federal Reserve's
evaluation of a bank holding company's proposal to make capital
distributions. Other considerations include the strength of the firm's
capital planning processes and plans to meet international capital
agreements as new requirements are phased in beginning in 2013.
Methodology and Results for Stress Scenario Projections (PDF)
March 16, 2012: Comparison of revisions (PDF)
For media inquiries, call 202-452-2955

1. The capital plans rule stipulates that the firms must demonstrate their
ability to maintain tier 1 common ratios above 5 percent. Further, the

minimum levels for firms to be considered adequately capitalized are 4
percent for the tier 1 ratio, 8 percent for the total capital ratio, and 3 or 4
percent for the tier 1 leverage ratio, depending on whether the institution
is subject to the market risk capital charge. Ratios can be found on table
2 of the attached paper. Return to text

Last Update: March 13, 2012

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