Stress tests show how Fed pushed on balance sheets

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.

Banks “have sufficient capital to weather a severe storm,” said Ernest Patrikis, a partner at White & Case LLP and former general counsel at the Federal Reserve Bank of New York. “One question is whether they will have too much capital.”

Bank of America CEO Brian Moynihan and other executives have complained that carrying too much capital could restrict lending.

Of the $534 billion in total projected losses, $341 billion comes from loan-portfolio losses, the Fed said. Loans and trading portfolio and counterparty losses account for 85 percent of the total, the Fed said.

Six bank-holding companies with large trading, private equity and derivatives activities were also subjected to tests of these positions from a “global market shock.” The six were Citigroup, Bank of America Corp., Wells Fargo, Morgan Stanley, Goldman Sachs Group Inc. and JPMorgan Chase.

Better Positioned

“Some banks are better positioned than others, and you’re going to see them start to steal some market share and sort of separate themselves,” said William Fitzpatrick, a Milwaukee- based financial-services analyst at Manulife Asset Management, whose team oversees $800 million and invests in companies such as Citigroup, JPMorgan Chase and MetLife. “We’re going to see some separation between the winners and the ones that didn’t pass.”

The stress tests are now a standard feature of the Fed’s big-bank supervision and oversight of financial risk. The concept was born in late 2008 when Chairman Ben S. Bernanke was trying to discern the maximum losses facing the banking system following the collapse of Lehman Brothers Holdings Inc.

Focus on 19

The Fed’s focus on the l9 largest institutions’ capital management also reflects a wary attitude toward boards that paid out more than $43 billion in dividends as housing markets started to deteriorate in 2007, according to comments last year by Patrick Parkinson, the former director of the Fed’s Division of Banking Supervision and Regulation.

Citigroup’s proposed capital actions would leave the third- biggest bank with Tier 1 common capital of 4.9 percent, below the 5 percent minimum require by the regulators, according to yesterday’s results. Citigroup would meet the requirement only if it doesn’t change the amount of capital it returns to shareholders, the test results showed.

A senior Fed official said in a conference call with reporters that the central bank’s models showed higher estimated losses than those submitted by the banks, while declining to specify in what categories.

The results were originally due to be announced on March 15. The official said they were released early because of a possible inadvertent release of information. The official said JPMorgan Chase’s release was the result of miscommunication between the Fed and the bank, and didn’t cause the Fed’s accelerated release of the results.

Bloomberg News

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