Zions Bancorporation (NASDAQ:ZION) is up 1.8% in trading today after the Federal Reserve announced that it had accepted the bank’s re-submitted capital plan, as the bank managed to squeak out a 5.1% capital tier 1 common ratio even under the new severe adverse conditions set by the Federal Reserve. Zions was the only bank to fall below the minimum ratio in this year’s stress test, though other banks also had their capital plans rejected because the dividends and buybacks were judged to be too high.
Zions expected to raise $300 million or more in common equity
The details of Zions Bancorporation (NASDAQ:ZION) capital plans haven’t yet been made public, but we already know from the bank’s earlier statements that the sale of its CDOs is part of the plan. Analysts have speculated that the Fed will also require Zions to raise $300 million or more in common equity to give it even more of a buffer.
The additional equity will dilute Zions Bancorporation (NASDAQ:ZION) stock, but that’s already been taken into account by the market, so the capital plans shouldn’t cause the stock to drop unless the issuance is toward the top end of analysts’ estimates at $700 million or more.
Second round stress test may have been more challenging
One of the big questions for other banks is how the Comprehensive Capital Analysis and Review changed the second time around. Even though the minimum capital tier 1 common ratio remained at 5% for the severe adverse conditions, The Fed said in today’s announcement that it had “developed updated supervisory scenarios for the resubmission of Zions Bancorporation’s 2014 capital plan, reflecting the later start date for projections in the resubmission.”
As a practical matter that means Zions Bancorporation (NASDAQ:ZION) capital ratios aren’t comparable to the other banks in this year’s stress tests, but many people wonder if ‘updated’ is a euphemism for ‘more severe’. Tightening down on banks that fail is one way to give SIFIs a reason to err on the side of too much equity, though getting punished by the market has been another powerful incentive. Even if we don’t find out the exact details of the new scenarios, the amount of extra common equity that Zions has to raise should give an indication of how strict it they were.