Updated from 8:42 a.m. ET with morning market action and comment from Credit Suisse analyst Moshe Orenbuch.
NEW YORK (TheStreet) -- Now that the first round of the Federal Reserve's annual stress-test process is complete, the biggest loser is Zions Bancorporation (ZION) of Salt Lake City, but Bank of America's (BAC) results are also of concern to investors.
In the first round of stress tests -- known as the Dodd-Frank Act Stress Tests, or DFAST -- 30 large banks had to show they could remain well-capitalized, with Tier 1 common equity ratios of at least 5.0%, through a nine-quarter "severely adverse" economic scenario. The list of banks being tested grew from 18 last year, with Zions among several regional banks being added to the tests.
Zions was the only bank to fail DFAST, with a minimum Tier 1 common equity ratio of just 3.5%. Bank of America passed, but had the third weakest minimum Tier 1 common equity ratio through the nine-quarter scenario, at 6.0%.
The second-weakest was M&T Bank (MTB) of Buffalo, N.Y., with a minimum Tier 1 common equity ratio of 5.9%. But M&T is in the midst of getting its Bank Secrecy Act and anti-money laundering compliance house in order, as it prepares to complete its long-delayed acquisition of Hudson City Bancorp HCBK of Paramus, N.J. M&T is very unlikely to request any increase in dividends or to request approval for any share buybacks in the second round of the stress tests.
Shares of Bank of America were down 1.3% in morning trading to $17.69, while Zions was down 2.7% to $32.11.
The second round of tests is the Comprehensive Capital Analysis and Review, or CCAR, which incorporates banks' plans to deploy excess capital through dividend increases, share buybacks and/or acquisitions. Those results will be announced on March. 26, with most of the tested banks making their own capital return announcements the same day.
This year's "severely adverse" scenario 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.
In addition to expanding the list of banks being tested, the Fed introduced new elements for the largest banks that are considered global systemically important financial institutions (G-SIFIs). The tests for these banks factor in the instant default of a bank's largest counterparty for trading of swaps and other derivatives.