21 June 2018

Financial Times: US banks clear first round of Fed stress tests

US banks’ hopes of making record payouts to shareholders over the coming year were boosted as the industry cleared the first round of the Federal Reserve’s stress tests — although Goldman Sachs and Morgan Stanley scored lowest on a key measure of financial strength.

Regulators said that 35 of the country’s biggest banks had shown that their balance sheets were strong enough to cope with the kind of financial meltdown that caused several lenders to fail in 2008.

The banks tested would register $578bn in losses in the Fed’s simulated economic shock, yet they would be able to continue lending and emerge from the crisis without another taxpayer bailout.

Some banks come closer than others to breaching minimum capital levels in the tests’ worst-case scenario, however. Goldman Sachs’ so-called supplementary leverage ratio — a simple measure of equity to total assets — would fall as low as 3.1 per cent and Morgan Stanley’s to 3.3 per cent.

Banks are required to maintain an SLR ratio of at least 3 per cent.

In an apparent move to reassure investors, Goldman said in a statement that the figures published “may not represent our firm’s actual capital return capacity, which may be higher than this year’s test would otherwise indicate”. The bank said it planned to discuss the models used in the tests with Fed officials.

Morgan Stanley and JPMorgan Chase also issued statements cautioning investors against drawing conclusions about the more consequential second-round test results coming next week, which determine how much capital banks can return to shareholders via dividends and stock buybacks.

Although banks have already submitted capital return plans to the Fed, they could revise them to be more conservative if, based on the first-round results, they judge that regulators are likely to reject them.

On another measure of financial strength, the common equity tier one (CET1) ratio, State Street trails rivals. Its ratio drops to 5.3 per cent, compared with a 4.5 per cent minimum requirement, in a stress scenario. Goldman’s CET1 metric declines to 5.6 per cent.

Senior Fed officials said the first round results had no regulatory consequences and should not be used to make assumptions about how banks would perform in the second part of the tests or the subsequent capital returns.

Full article on Financial Times (subscription required)

© Financial Times