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A list of the 33 Bank Holding Companies participating in this year's stress test is featured on page 7 - immediate download just $25.
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Nobody wants another banking meltdown. That’s why, each year since 2009, the Federal Reserve has created hypothetical scenarios to determine how well some of the nation’s largest and most systemically important bank holding companies would fare under extreme stress.
Each year the Federal Reserve comes out with two new hypothetical sets of scenarios to test the resiliency of these holding companies: adverse and severely adverse. The hypothetical scenarios this year represented:
Moderate recession in U.S.
Mild deflation in U.S.
Severely Adverse Scenario
Severe global recession
Domestic unemployment up 5%
Heightened period of financial stress
Negative yields on short-term Treasuries
Even in the severely adverse scenario, most companies did quite well as U.S. firms have substantially increased their capital since the first round of tests seven years ago.
The actual fourth quarter 2015 aggregate Common Equity Tier1 (CET1) ratio of the 33 H.C.s participating this year was 12.3%. The CET1, which compares high-quality capital to risk-weighted assets, has more than doubled from 5.5% in the first quarter of 2009. And, all 33 banks passed the mandated 4.5% minimum in both the adverse and severely adverse scenarios.
Although, there were some caveats:
M&T Bank Corporation met minimum capital requirements on a post-stress basis after submitting an adjusted capital action plan.
The Federal Reserve is requiring Morgan Stanley to submit a new capital plan by December 29, 2016 to address certain weaknesses in its capital planning processes.
(Note: These 33 firms represent 80% of U.S. domestic bank assets.)
The Federal Reserve objected to the capital plans of Deutsche Bank Trust Corporation and Santander Holdings USA, Inc. based on qualitative concerns. In other words, the assumptions or methodologies used by Deutsche Bank and Santander Holdings are either not reasonable, not appropriate or just plain insufficient. As a result of these objections, these two companies may only make capital distributions with express Federal Reserve approval.
While both H.C.s have improved from 2015, they still have material supervisory issues that critically undermine the capital planning process. The issues at hand limit their ability to adequately assess capital adequacy.
Deutsche Bank & Trust Corporation:
For Deutsche Bank, the deficiencies are primarily in its risk management and control infrastructure.
Santander Holdings USA, Inc.:
Santander’s deficiencies lay in loss and revenue projections as well as risk-management and monitoring.
These companies may choose to submit revised plans once substantial progress is made in regard to the issues cited in their respective objections.
As far as Quantitative Objections, once M&T Bank Corp. submitted adjusted capital actions, there were none.
The chart on page 7 shows the projected minimum capital ratios of all 33 H.C.s under both the Adverse and the Severely Adverse scenarios. For M&T we listed both the original plan followed by / and the adjusted plan minimums.
Remember, these numbers are all hypothetical estimates; they are not real. They involve economic conditions that are far more severe than expected. Also, these minimums reflect a nine-quarter period (Q1’2016 to Q1’2018) and do not necessarily occur in the same quarter for all H.C.s listed.
Deutsche Bank TC, New York, NY with $53 billion in assets is the 41st largest U.S. bank H.C. Its parent is Deutsche Bank Aktiengesellschaft, out of Frankfurt, Germany; its U.S. bank subsidiaries include Deutsche Bank TC Americas, New York, NY and Deutsche Bank TC Delaware, Wilmington, DE.
Santander Holdings USA, Inc., Boston, MA with $131 billion in assets is the 26th largest U.S. bank H.C. Its parent is Banco Santander, S.A. out of Spain and its U.S. bank subsidiary is Santander Bank, NA, Wilmington, DE.
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