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.
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.
In a rare interview with Harvard Business School that was published online earlier this month, (it has since been taken down) value investor Seth Klarman spoke at length about his investment process, philosophy and the changes value investors have had to overcome during the past decade. Klarman’s hedge fund, the Boston-based Baupost has one of Read More
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.