Bank Stress Tests: Failure Roundup
Updated to include the Federal Reserve's partial rejection of Fifth Third Bancorp's capital plan.
NEW YORK ( TheStreet) -- There are plenty of headlines indicating that several bank holding companies failed the Federal Reserve's annual bank stress tests, but it's not quite that simple.
The 19 large, complex bank holding companies subject to the Fed's Comprehensive Capital Analysis and Review (CCAR) for 2012 were stress-tested under a severe economic scenario that included real U.S. GDP contracting "sharply through late 2012, with the unemployment rate reaching a peak of just over 13 percent in mid-2013," while also assuming "that U.S. equity prices fall by 50 percent from their Q3 2011 values through late 2012 and that U.S. house prices fall by more than 20% through the end of 2013." In addition, under the Fed's adverse scenario, "foreign real GDP growth is also assumed to contract, with growth slowdowns in Europe and Asia in 2012."
In order to pass the stress tests, the results had to show that the group of 19's estimated Tier 1 common equity ratios would remain over 5% under the adverse economic scenario.
In order to have their capital plans approved, the companies' estimated Tier 1 capital ratios at the end of 2013 would have to be above 5%, "with all proposed capital actions through Q4 2013."
Some analysts were afraid that Bank of America (BAC) might have failed the stress tests. The company didn't include any plans to raise dividend payouts or buy back shares, in its stress test submission to the Fed.
KBW analyst Jefferson Harralson on Monday said that Bank of America's estimated Basel 1 Tier 1 common equity ratio could have wound up at 4.66% according to the Fed's stress test scenario, which could have brought tremendous pressure on the shares.
According to the Fed's stress test results, Bank of America's estimated Tier 1 common equity ratio under the adverse economic scenario would be 5.7%, increasing to an estimated 5.9% at the end of 2013, so BAC passed with flying colors, despite the company's huge mortgage putback burden, which was also stress tested.
The only member of the group of 19 failing the stress tests outright, with no planned return of capital to investors, was the privately held Ally Financial , formerly GMAC. As of Dec. 30, the U.S treasury held 73.8% of Ally's common shares, and also $5.9 billion in mandatorily convertible preferred stock, according to Ally's annual 10-K filing. The Treasury "is entitled to appoint six of the eleven total members of the Ally Board of Directors," according to the filing.
Ally Financial reported a Tier 1 common equity ratio of 7.57% as of Dec. 30. The Fed's stress test results showed that under the adverse economic scenario, Ally's estimated Tier 1 common equity ratio would be just 2.5%.