Stress Tests Show Fed Push

Regulators succeeded in encouraging banks to improve their balance sheets.

The resilience of the largest U.S. financial firms when tested against a recession more severe than the last one shows regulators have succeeded in pushing banks to build fortress-like balance sheets.

The Fed yesterday said 15 of 19 banks would be able to maintain capital levels above a regulatory minimum in an “extremely adverse” economic scenario, even while continuing to pay dividends and repurchasing stock. Those results were due to scrutiny by the Fed on capital payouts over the past three years, the central bank said.

Adequate Capital

The Fed tested the banks to ensure that they have adequate capital to continue lending in a downturn. The test assumed an unemployment rate of 13 percent -- compared with a peak of 10 percent as a result of the 18-month recession that ended in June 2009 -- a 50 percent drop in stock prices and a 21 percent decline in house prices. It showed that those circumstances would produce aggregate losses of $534 billion over nine quarters.

Tougher Standards

The Fed started the test and review of banks’ forward- looking capital strategy in November, saying they should have “credible plans” to meet tougher standards required by new regulations.

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