Capital Adequacy At The Largest US Banks Is Broadly Improved, Say Latest Stress Tests; Fitch Affirms US AAA Credit Rating

March 22, 2014 in Forex Fundamentals and News

The results of the latest stress tests on the biggest US financial institutions and banks reveal that their capital positions have improved over the past five years, and that they are “collectively better positioned to continue to lend to households and businesses and to meet their financial commitments in an extremely severe economic downturn than they were five years ago,” says the press release from the Fed.

The “extremely severe downturn” is the most severe stress scenario – a massive recession, crash in equities of over 50%, high unemployment and a slide in housing prices to 2001 levels. If such a situation lasted nine quarters, the 30 bank holding companies that were subjected to the test would collectively suffer about $366 billion in loan losses, estimates the Fed.

In such a situation, the tier 1 common capital ratio would fall from the actual 11.5% as at the end of Q3 2013 to 7.6%. This is a marked improvement over the post-stress number of 5.5% estimated in 2009.

“The annual stress test is one of the Federal Reserve’s most important tools to gauge the resiliency of the financial sector and to help ensure that the largest firms have strong capital positions,” Federal Reserve Governor Daniel K. Tarullo said.

Of the 30 banks, only one, Zions Bancorporation, failed the minimum threshold of 5% capital ratio.

Fitch says US credit ratings at AAA, stable

In a separate but positive development, ratings agency Fitch affirmed the U.S.’s long-term foreign and local currency issuer default ratings, as well as its senior unsecured foreign and local currency bonds at a AAA (triple A) with stable outlook.

The reasons for the outlook included the management of the country’s debt limit in a timely and judicious manner, a decline in the federal budget deficit and low financial-sector risks.


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