Trepp used its own model to evaluate the effects of stressing the balance sheets and income statements of more than 6,000 U.S. banks. Trepp's model is adapted from the framework used by the Federal Reserve Bank's Comprehensive Capital Analysis Review Stress Testing of the 19 largest banking institutions in March.
According to the new stress test, Trepp determines that one in eight banks received a ‘failing grade.’ This conclusion is based on the stress test's combination of individual bank data with severely adverse inputs, which created ‘what-if’ scenarios for earnings, capital and asset performance for a nine-quarter projection period.
Using second quarter data, 784 of the 6,151 banks tested (12.7%) failed the Trepp stress test because they did not meet the minimum requirements for capital adequacy. A passing grade required a bank to maintain ratios in excess of regulator-defined thresholds, assuming severe stress on 12 macroeconomic variables, including real gross domestic product growth, unemployment, interest rates and home prices.
For the banks that failed the test, Trepp estimates that an additional $25 billion to $27 billion of capital would be required in aggregate to achieve a passing grade.
‘A significant number of banks are at risk of falling short of capital adequacy requirements unless they take some type of corrective action,’ says Matt Anderson, Trepp's lead bank analyst. ‘The report shows that the industry still has a way to go before a full recovery.’
Trepp's complete summary can be obtained online.