Fed Stress Tests Show Banks In Decent Shape, With A Couple Caveats

Written by Michael Bates
on March 14, 2012 No Comments
Categories : Residential Mortgage

The Federal Reserve yesterday released summary results of its latest bank stress tests, and the Fed says the majority of the largest U.S. banks would be able to withstand an ‘extremely adverse’ economic scenario.

The Fed's Comprehensive Capital Analysis and Review (CCAR) process uses a hypothetical scenario to evaluate banks' capital adequacy and capital-planning processes. In a severe-stress scenario (a peak unemployment rate of 13%, a 50% drop in equity prices, and a 21% decline in housing prices), losses at the 19 banks the Fed reviewed would total about $534 billion over nine quarters.

These 19 banks have increased their tier 1 common capital levels to $759 billion in the fourth quarter of 2011, up from $420 billion in the first quarter of 2009, the Fed notes. However, the banks' exposure to consumer-related lending, especially residential mortgages, currently represents the highest risk for substantial losses in a severe-stress scenario.

‘Losses on residential mortgage loans, including both first liens and junior liens/home equity, are the single largest category, at $118 billion, representing nearly 35 percent of total projected loan losses,’ the report states.

According to the Fed stress tests, Citi, Wells Fargo, PNC Bank and Regions Financial would have the highest loss rates among first-mortgages lenders. Ally Financial, Citi and Bank of America show the highest levels of losses in junior liens and home equity lines of credit, while State Street Corp. would experience – by far – the highest commercial real estate loss rates.

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