Stress test results show banks are healthier

Citigroup, State Street and Bank of New York Mellon are among the winners.

By Charley Blaine Mar 8, 2013 4:35PM
Financial stocks opened nicely higher and then pulled back a bit on Friday after the Federal Reserve stress tests on 18 major financial institutions concluded that all but one would survive with a capital ratio of 5% in the event of a severe economic disruption.

Many analysts said the results, released after the markets closed on Thursday, reflected the financial industry's steady recovery from near collapse in 2008 and 2009.

The one that couldn't keep its capital ratios over 5% was Ally Financial, the new name for General Motors Acceptance Corp., which is still the world's largest financier of auto purchases.
What the Fed meant by "a severely adverse" economic scenario was just that: a 5% decline in gross domestic product, unemployment reaching 12%, stock prices falling at least 50% and recessions overseas. In other words, something like the 2008 financial crisis.

Ally disputed the Fed's conclusions in a statement, saying it didn't understand the assumptions the Fed used. The Central Bank seemed to think in a severe downturn that there would be massive defaults on auto loans. Ally says auto loan performance holds up fairly well even in a severe recession.

Where Ally did get into trouble was with its Residential Capital mortgage operation. ResCap lent aggressively, the New York Times said, and is now paying the price in terms of loans gone bad. ResCap, as it is often called, has been in Chapter 11 bankruptcy since last year. The stress-test result notes that ResCap could act as a drag on Ally.  © John Foxx, Stockbyte, Getty Images

Actually, Ally has been complaining about the stress tests for two years, saying that the Fed doesn't understand its finances. Of course Ally has history. It is nearly 74% owned by the U.S. Treasury after GM was bailed out in 2008 and 2009. The balance is split between General Motors and Cerberus Capital.

The results were good news for Citigroup (C), Bank of New York Mellon (BK), KeyCorp. (KEY), State Street (STT) and Wells Fargo (WFC). Shares of the five hit 52-week highs on Friday.

The Financial Select SPDR (XLF) exchange-traded fund, which tracks the financial sector of the Standard & Poor's 500 Index ($INX), is up 11% this year.

After the Ally's complaints, the weakest links were -- and we're not kidding -- Goldman Sachs (GS) and Morgan Stanley (MS), the giant investment banks. It's not that they would fail, under the Fed's worst-case scenario. It's that they would get beaten up financially because the scenario the Fed sees would basically freeze up credit markets.

Banks and investment banks routinely lend each other money every day. That's how they have the cash to pay their bills. And in a crunch, that lending would stop. And that's essentially happened in the fall of 2008.

In fact, the results of the stress tests should result next week in institutions announcing they will boost dividends, buy in stock or both.

Citigroup, which basically failed last year's stress test and cost then-CEO Vikram Pandit his job, did quite well this year and has already asked for approval to buy back $1.2 billion in shares. The stock was up $1.19 to $46.19 Friday afternoon.

The stress tests are part of of the Dodd-Frank banking bill, which passed in 2009. But they were instituted by Federal Reserve Chairman and then-Treasury Secretary Tim Geithner as a way to boost confidence in the banking system.

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5Comments
Mar 11, 2013 8:46AM
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havasu46, what destroyed the US housing market was government POLICY.   The policy of encouraging (arm twisting banks), to lend money to home buyers without 20% down, so they could gamble in the real estate market.

None of the collapse would have happened had the deadbeat borrowers made their payments.  The Banks only made these loans because of government pressure and the government allowing them to dump them.

In effect, this was the DIRECT result of government POLICY.

Stop blaming the Free Market for government policy...   No margin requirement, no taxes due on RE profits (under 500,000) and tax deductions for mortgage interest.

These are the causes of the RE market collapse...   And the two people most responsible for the mess Dodd and Frank  get a "reform" bill named after them...  too funny...  
Mar 10, 2013 1:04PM
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Gee, the TBTF banks and their Wall Street buddies almost destroy the US financial and real estate systems with the FED and taxpayers spending 4 years to bail them out and now stress tests show they're healthier.  The TBTF banks, BAC, C, GS, JPM, should've been nationalized 4 years ago with each taxpayer getting shares as part of their last 4 years tax refunds. AIG, Bank of America and Citicorp should never have been saved.
Mar 10, 2013 10:22PM
avatar

Who wants to bet you're wrong?

 

Goldman Sachs Group Inc., and lagged behind peers in a key measure of capital strength used by U.S. regulators to stress- test their resiliency in a severe recession.

Mar 10, 2013 1:46PM
avatar

Having had investments in Financial Institutions, usually Regional Banks in the past; Exception would be Mutual Funds owned several years ago...

Kinda feel we have missed the boat on the latest upswings (last couple years) in some of those same banks...Oh well..

But still have managed to keep a finger(or buck) in that world with REITS..

They may not have appreciated as much..

But have kept close to par with ensuing dividends...The last 3 years..

Maybe I should consider looking back again towards a couple Regionals or even WFC...??

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