In its press release announcing the stress-test results, the Federal Reserve said that even under its "severely adverse" economic scenario, under which the 30 tested banks would lose a combined $366 billion over the nine-quarter period, the group's minimum Tier 1 common ratio would be 7.6%, "significantly higher than the 30 firms' actual tier 1 common ratio of 5.5 percent measured in the beginning of 2009."
This first part of the regulator's two-part annual process is known as the Dodd-Frank stress tests. The "severely adverse" this year assumes an increase in the U.S. unemployment of four percentage points, with the unemployment rate peaking at 11.25% in mid-2015. The scenario also includes a decline in real U.S. GDP of nearly 4.75% through the end of 2014, a 50% decline in equity prices and a 25% decline in home prices.
The severely adverse scenario also has international components, including recessions Europe and Japan, and slowing growth in Asia. For the U.S.-owned holding companies being tested, this part of the scenario is most important for Citigroup, which derives the majority of its revenue and earnings from outside North America.The second part of the stress tests is the Comprehensive Capital Analysis and Review (CCAR), which applies banks' plans to deploy excess capital through dividend increases, stock buybacks and/or acquisitions to the same "severely adverse" scenario. For bank-stock investors, CCAR is the more important part of the stress-test process. The Fed will announce those results on March 26, with most of the stress-tested banks expected to announce dividend increases and/or stock buyback plans the same day. This year the Fed has increased the number of banks undergoing the stress tests and CCAR, with Zions among several large regional banks added to the list. Looking at the test results, 29 of the 30 banks would show minimum Tier 1 common equity ratios of over 5.0% through the nine-quarter scenario period, except for Zions Bancorporation, which would have a minimum Tier 1 common equity ratio of just 3.5%. A call to Zions requesting comment was not returned. The bank with the next-lowest Tier 1 common equity ratio through the "severely adverse" scenario was M&T Bank (MTB) of Buffalo, N.Y., which is also among the regional lenders added to this year's stress-test group. Bank of America (BAC - Get Report) had the third-lowest minimum Tier 1 common equity ratio among the 30 stress-tested banks, at 6.0%. Federal Reserve Governor Daniel Tarullo in the regulator's press release said, "Each year we are making substantial improvements, which have helped make the process even stronger than when we first conducted the stress tests in the midst of the financial crisis five years ago." Shares of Zions Bancorporation rose 3.2% to close at $32.99 on a very strong day for bank stocks, leading into the stress-test results. Follow @PhilipvanDoorn