Stress Tests Shows U.S. Banks Can Withstand Economic Downturn

Stress Tests Shows U.S. Banks Can Withstand Economic Downturn
Joe Mabel [CC BY-SA 3.0], via Wikimedia Commons

U.S. banks, including Bank of America Corp (NYSE:BAC), Wells Fargo & Co (NYSE:WFC) and JPMorgan Chase & Co (NYSE:JPM), conducted their mid-cycle stress tests as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The results showed that the banks are capable of withstanding a severe economic downturn.

Stress Tests Shows U.S. Banks Can Withstand Economic Downturn

Bank of America well above regulatory minimum in stress tests

Bank of America Corp (NYSE:BAC) reported that it has enough capital in case the economy suffers a decline for two years. The company has $2 trillion in its balance sheet and, based on its stress test, its lowest point in the hypothetical scenario for Tier 1 capital ratio is 8.4 percent. The regulatory minimum is 4 percent and regulators want a minimum of 8 percent for big banks.

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During a hypothetical downturn, Bank of America Corp (NYSE:BAC)’s pre-tax net loss would be around $26.1 billion, credit card portfolio loss at around $14.2 billion or 15.7 percent—the worst in all of the bank’s units. In addition, the bank said it might suffer $13.9 billion losses in trading and counter party risks, $36.8 billion total loss on all loan portfolios (4.4 percent), 11.7 percent peak unemployment rates, and will undergo 6 quarters of negative GDP growth in a two-year hypothetical scenario.

Wells Fargo & Co to fair even better than Bank of America in tests

On the other hand, Wells Fargo & Co (NYSE:WFC) reported that under a severely adverse economic situation, its Tier 1 common equity ratio will decline to as low as 9.9 percent during the nine quarter test scenario.  The company has $1.4 trillion assets.

According to the bank, its projected pro forma net loss before taxes was approximately $3.8 billion for the nine quarter test horizon, and its estimated pre-provision net revenue was  $52.6 billion, which represents declining levels of net interest income mainly caused by portfolio contraction, margin compression, and faster pre-payments of residential mortgages.

Wells Fargo & Co (NYSE:WFC) projected that its loan and lease losses would be around $48.5 billion, losses on AFS securities would be $2.6 billion, and trading & counter-party losses at $5.1 billion during the nine quarter hypothetical scenario.

JPMorgan Chase & Co is also solid in the hypothetical scenarios

Meanwhile, JPMorgan Chase & Co (NYSE:JPM) demonstrated its ability to survive an economic crisis; its Tier 1 common equity ratio was 8.5 percent. The bank projected that it would endure a net loss before tax of 0.3 billion for the second quarter of 2013 until the middle of 2015 in case of a severe economic decline.

The bank estimated that incur $32.1 billion loan losses and $17.5 billion trading and counter party losses during a down turn.

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