“All but one of the nation’s 18 biggest banks could survive even a severe recession and still have enough capital to keep lending, the Federal Reserve said Thursday.
Ally Financial would fall below the central bank’s guideline for how much capital would be needed in a downturn, the report said.
As a whole, the banks would lose $462 billion over nine quarters from a combination of loan write-downs and the falling value of securities, in a recession where unemployment hit nearly 12%, stocks lost half of their value and home prices dropped 20%.
“The stress tests are a tool to gauge the resiliency of the financial sector,” Federal Reserve Governor Daniel Tarullo said in a statement. “Significant increases in both the quality and quantity of bank capital during the past four years help ensure that banks can continue to lend to consumers and businesses, even in times of economic difficulty.”
The tests show banks’ woes are unlikely to intensify a future economic downturn, as in 2008 when they made the recession worse because they had too little capital to keep lending, said Paul Edelstein, director of financial economics at IHS Global Insight.
“Banks wouldn’t have to cut back sharply on lending to recapitalize themselves, even though they would take some pretty significant losses,” Edelstein said. “They have a cushion to absorb the losses now.”
Banks bolstered their capital in the last year by retaining their profits and shedding risky or non-performing assets, according to Keefe Bruyette & Woods, an investment bank specializing in bank stocks.
Wall Street has been awaiting the stress tests partly to learn whether the Fed will allow big banks including Citigroup to resume paying dividends…..”
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