Fed’s Stress Tests: Citi, Ally, SunTrust, MetLife Didn’t Pass

The Federal Reserve said 15 of the 19 biggest U.S. financial institutions would be able to maintain capital levels higher than is deemed necessary in an economic scenario worse than the financial crisis of 2008.
The results of the Fed’s stress tests, authorized by the Dodd-Frank Wall Street reform law, will help bank regulators avoid another close call like the one three and a half years ago that initiated the massive bailouts of the nation’s biggest banks.
The stress scenario included a peak unemployment rate of 13 percent, a 50 percent drop in equity prices, and a 21 percent decline in housing prices.
Losses at the 19 bank holding companies are estimated to total $534 billion during the nine quarters of the hypothetical stress scenario.
The 15 of the 19 bank holding companies were estimated to maintain capital ratios above all four minimum levels set by regulators under the hypothetical stress scenario, even after considering  proposed actions such as dividend increases or share buybacks.
Four institutions failed at least one of the criteria in the stress tests: Citigroup, SunTrust Banks, Ally Financial and the insurance giant Metlife, the Fed said. These companies would have to raise more money to protect reserves against economic distress.
Those that passed the largest institutions by consolidate assets: Bank of America, J.P. Morgan Chase, Goldman Sachs and Wells Fargo. These institutions can increase dividends or buy back shares, potentially raising their stock prices.
Ally Financial, formerly GMAC, the Detroit-based home and auto lender, said in a statement that the central bank’s review “dramatically overstates potential contingent mortgage risk, especially with respect to newer vintages of loans.”
Ally also said the stress test does not adequately contemplate “contingent capital that already exists within Ally’s capital structure that could be available at the Federal Reserve’s discretion in the event there was concern about Ally’s capital adequacy.”
“Ally continues to have ongoing constructive discussions with its regulators surrounding these matters, and the company will submit a revised capital plan in the near future,” Ally said in its statement.
In a statement, Citigroup said the Federal Reserve objected to Citi’s proposed return of capital to shareholders.
“In light of the Federal Reserve’s actions, Citi will submit a revised Capital Plan to the Federal Reserve later this year, as required by the applicable regulations,” the bank said.
Both Citi and Ally received bailouts under the Troubled Asset Relief Program. Both are also among the five lenders in the $25 billion mortgage settlement with state and federal officials over shoddy or improper foreclosure documentation. Bank of America, JPMorgan Chase and Wells Fargo are also required to provide borrowers relief in the form of mortgage write-downs, refinancing or compensatory checks.
The Fed said that the latest round of stress test results “show that the majority of the largest U.S. banks would continue to meet supervisory expectations for capital adequacy, despite large projected losses in an extremely adverse hypothetical economic scenario.”
SunTrust’s chief financial officer, Aleem Gillani, said the bank has used its own modeling techniques, which have shown to have a high level of predictability.
“SunTrust’s estimates for loan losses and pre-provision net revenue in the Supervisory Stress scenario are significantly more favorable than those made by the Federal Reserve,” Gillani said.

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