Econintersect: The Federal Reserve Board completed the 2014 stress test with a review of the capital plans of the largest U.S. banks. Of the 30 banks that underwent the stress tests (results announced last week), 25 passed the required review and were granted acceptance of captial disbursement plans. The items included planned dividend payments, stock buybacks and some aspects of compensation. Two of the approved plans were from banks that had to resubmit amended plans in order to reach acceptance: Bank of America and Goldman Sachs.
The five banks failing to gain approval were Citigroup, HSBC North America Holdings, RBS Citizens Financial Group, Santander Holdings USA and Zions Bancorp. Zions failed to be approved because they failed to pass the minimum capital requirements in last week's severely adverse scenario results.
At this juncture the four banks that passed the stress tests last week may submit further revisions to disbursement plans to try for approval. Their ability to increase dividends, stock buybacks and make other capital disbursements are in limbo until such revised capital plans are approved. Zions will be restricted from making capital disbursements increases at all because they are below the minimum required capital.
Stocks of the five banks in after hours trading Wednesday (prices compared to Tuesday close):
- Citigroup (NYSE:C): Down 5% at 47.55
- HSBC Holdings (NYSE:HSBC): Down 0.4% at 50.57
- RBS Citizens (NYSE:RBS): Down 3% at 10.00
- Zions Bancorporation (NYSE:ZION): Down 1% at 30.20
- Santander Holdings USA is not traded in the U.S.
Click on the cover below to access the complete Fed report (pdf):
The press release from the Federal Reserve:
Release Date: March 26, 2014
For immediate release
The Federal Reserve on Wednesday announced it has approved the capital plans of 25 bank holding companies participating in the Comprehensive Capital Analysis and Review (CCAR). The Federal Reserve objected to the plans of the other five participating firms--four based on qualitative concerns and one because it did not meet a minimum post-stress capital requirement.
Strong capital levels help ensure that banking organizations have the ability to lend to households and businesses and to continue to meet their financial obligations, even in times of economic difficulty. Now in its fourth year, the Federal Reserve in CCAR evaluates the capital planning processes and capital adequacy of the largest bank holding companies, including the firms' proposed capital actions such as dividend payments and share buybacks and issuances.
When considering an institution's capital plan, the Federal Reserve considers both qualitative and quantitative factors. These include a firm's capital ratios under severe economic and financial market stress and the strength of the firm's capital planning process. After the Federal Reserve objects to a capital plan, the institution may only make capital distributions with prior written approval from the Federal Reserve.
"The Federal Reserve's annual capital plan assessment provides a structured and comparative way to promote and assess the capacity of large bank holding companies to understand and manage their capital positions," Federal Reserve Gov. Daniel Tarullo said. "With each year we have seen broad improvement in the industry's ability to assess its capital needs under stress and continuing improvements to the risk-measurement and -management practices that support good capital planning. However, both the firms and supervisors have more work to do as we continue to raise expectations for the quality of risk management in the nation's largest banks."
The Federal Reserve can object to a capital plan based on qualitative or quantitative concerns, or both. The Federal Reserve can require a new capital plan from an institution outside of the annual review at any time if there is a material change in the condition of an individual institution or in the economy or financial markets that could potentially lead to a change in a firm's capital position.
The Federal Reserve did not object to the capital plans for Ally Financial Inc.; American Express Company; Bank of America Corporation; The Bank of New York Mellon Corporation; BB&T Corporation; BBVA Compass Bancshares, Inc.; BMO Financial Corp.; Capital One Financial Corporation; Comerica Incorporated; Discover Financial Services; Fifth Third Bancorp; The Goldman Sachs Group, Inc.; Huntington Bancshares Incorporated; JP Morgan Chase & Co.; Keycorp; M&T Bank Corporation; Morgan Stanley; Northern Trust Corporation; The PNC Financial Services Group, Inc.; Regions Financial Corporation; State Street Corporation; SunTrust Banks, Inc.; U.S. Bancorp; UnionBanCal Corporation; and Wells Fargo & Company. Bank of America Corporation and The Goldman Sachs Group, Inc., met minimum capital requirements after submitting adjusted capital actions.
Based on qualitative concerns, the Federal Reserve objected to the capital plans of Citigroup Inc.; HSBC North America Holdings Inc.; RBS Citizens Financial Group, Inc.; and Santander Holdings USA, Inc. The Federal Reserve objected to the capital plan of Zions Bancorporation because the firm did not meet the minimum, post-stress tier-1 common ratio of 5 percent.
U.S. firms have substantially increased their capital since the first set of government stress tests in 2009. The aggregate tier 1 common equity ratio, which compares high-quality capital to risk-weighted assets, of the 30 bank holding companies in the 2014 CCAR has more than doubled from 5.5 percent in the first quarter of 2009 to 11.6 percent in the fourth quarter of 2013, reflecting an increase in tier 1 common equity of more than $511 billion to $971 billion during the same period.
That trend is expected to continue. All but two of the 30 participants in this year's CCAR are expected to build capital from the second quarter of 2014 through the first quarter of 2015. In the aggregate, the firms are expected to distribute 40 percent less than their projected net income during the same period. The 30 institutions in CCAR this year have a combined $13.5 trillion in assets, or approximately 80 percent of all U.S. bank holding company assets.
- Press Release (Board of Governors of the Federal Reserve System, 26 March 2014)
- Comprehensive Capital Analysis and Review 2014: Assessment Framework and Results (pdf) (Board of Governors of the Federal Reserve System, 26 March 2014)
- Stress Tests and Capital Planning (Board of Governors of the Federal Reserve System, 26 March 2014)
- Most Banks Pass Stress Tests (GEI News, 21 March 2014)
- Fed Corrects Stress Test Data Reported One Day Ago (GEI News, 22 March 2014)