BANKING STRESS TEST RESULTS
By Stephen Smith
June 3rd, 2009
The Supervisory Capital Assessment Program (SCAP) embarked on a comprehensive simultaneous assessment of the capital held by the 19 largest U.S. bank holding companies. A banking organization holds capital to guard against uncertainty. The capital guarantees an institution’s depositors, creditors, counterparties, and the institution itself that an unexpected surge in losses or earnings will not impair its ability to engage in lending to creditworthy borrowers and to protect its depositors. This unprecedented exercise, with the extraordinary economic and financial conditions that precipitated it, has led SCAP to take the unusual step to publically report the findings. The decision to depart from the standard practice of keeping examination information confidential stemmed from the belief that greater clarity around the SCAP process and findings would make the exercise more effective at reducing uncertainty and restoring confidence in our financial institutions.
The SCAP program is designed to estimate how much each bank holding company would lose if the economic downturn proved even deeper than the current estimate. Under the worst case scenario, the unemployment rate would rise to 10.3 percent by 2010, the economy would contract 3.3 percent in 2009, and housing prices would decline another 22 percent. In this scenario, the losses at the 19 banks during 2009 and 2010 could be $600 billion. The bulk of the estimated losses, approximately $455 billion, would come from accrual loan portfolios, particularly from residential mortgages and other consumer related loans. Estimated possible losses from trading related exposure and securities held in investment portfolios total $135 billion. The SCAP results suggest financial crisis related losses at these firms, if the economy were to follow the worst case scenario, would total nearly $950 billion by the end of 2010. The potential losses facing these 19 banks are then weighed against the potential resources available to them to absorb those losses. At the end of 2008, the capital ratios at all 19 bank holding companies exceeded the minimum regulatory requirements, in many cases by substantial margins. Tier 1 capital at these 19 banks totaled approximately $835 billion. The practical implication of this capital is that many of the banks already have substantial capital to absorb their share of the estimated losses.
The results from the stress test showed that 10 of the 19 banks needed to raise an additional $75 billion, broken down as follows: Bank of America, $33.9B; Citigroup, $5.5B; Fifth Third, $1.1B; GMAC, $11.5B; Keycorp, $1.8B; Morgan Stanley, $1.8B; PNC Financial, $0.6B; Regions Financial, $2.5B; Sun Trust, $2.2B; and Wells Fargo, $13.7B. Because of the transparency and the increased disclosure associated with the stress test, it has cleared the way for many institutions to raise private capital and is restoring confidence in our financial system.
