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.