NEW YORK (
) -- Analysts at
expect all banks under their coverage to pass the
2012 stress tests, even though the test assumes more difficult stressed scenarios.
"Reduced leverage, higher quality assets (lower risk,limited/no prop trading) and higher capital levels relative to prior exams should help banks withstand the stress of the Fed's exam," a team of analysts led by Richard Ramsden wrote in a report.
Banks will have to stress test their portfolios assuming an unemployment rate of 13%, a 21% decline in home prices and a 52% peak-to-trough equity market decline, all conditions being tougher than what was simulated in 2011.
Goldman Sachs ran a proprietary stress test on 21 banks, excluding Goldman of course, to simulate the Fed exam . In total, the analysts estimate that given the high levels of capital, the industry has the ability to absorb $900 billion in losses. "As such, all our banks passed our test," the analysts wrote.
In a scenario that sees loss rates as high as 2008/2009 for every quarter through 2013, banks could see an annual charge-off rate of 4%. The average bank could experience 3% to 5% credit-related charges on the total securities portfolio, assuming higher loss rates for structured products of 20%, moderate assumptions for credit-exposed housing related securities of 15% and no loss for safer securities such as Treasuries.
Goldman also stressed the large trading firms could see trading losses of $80 billion from the hypothetical global market shock and additional sovereign losses of $25 billion for the group assuming gross GIIPS exposure is marked down by 30%.
The scenario shows
Bank of America
scraping by with a Tier 1 Capital of 5.1%, while
had Tier 1 Capital levels of more than 7% each.
Discover Financial Services
to be best positioned and should be able to increase capital returns in 2012.
--Written by Shanthi Bharatwaj in New York
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