Stress Test Results: Big Banks Look Healthier As 29 of 30 Pass, Zions Fails

All banks, except Zions, met the Fed's 5% Tier 1 capital requirement under stressed economic conditions.

All but one bank passed the Federal Reserve's stress test today.

The Fed said 29 of the 30 big banks that underwent the Dodd-Frank Act stress test would have enough capital on hand to endure a major economic downturn. Zions Bancorp was the only bank that failed to meet the 5% top-tier capital threshold.

This year's DFAST examined how banks would hold up if a deep recession were to hit; the scenario included a sharp rise in the unemployment rate, a drop in equity prices of nearly 50%, and a decline in house prices to levels last seen in 2001.

Zions projected Tier 1 capital under the stressed scenario only reached 3.5%, falling short of the Fed's required 5% mark. Bank of America and JPMorgan Chase were also low on Tier 1 with 6% and 6.3% respectively. Wells Fargo hit 8.2% and Citigroup reached 7% under the hypothetical scenario.

Top stress test performers include Bank of New York Mellon and State Street Corporation with 13.1% and 13.3% in Tier 1 capital, respectively.

The Fed said the 30 banks would experience $501 billion in losses under the stressed environment. That includes projected loan losses of $366 billion, and $98 billion in trading and counterparty losses at the eight banks that have substantial trading or custodial operations.

'The largest banking institutions in the United States are collectively better positioned to continue to lend to households and businesses and to meet their financial commitments in an extremely severe economic downturn than they were five years ago. This result reflects continued broad improvement in their capital positions since the financial crisis,' the Fed said.

The stress tests were created after the 2008 financial crisis when banks were found to be overleveraged and overexposed to a bubbling real estate market. The annual stress test is one of the Federal Reserve's most important tools to gauge the resiliency of the financial sector and to help ensure that the largest firms have strong capital positions,' Federal Reserve Governor Daniel K. Tarullo said.

The results were the first of two tests for banks. Today's Dodd-Frank Act stress test (DFAST) measures how banks hold up under hypothetical economic conditions-banks are given a pass or fail grade. On March 26, the Fed is back again with results from the arguably more important Comprehensive Capital Analysis & Review (CCAR). The difference between the two tests are capital action plans-what banks do with their capital for shareholders, like offer dividends or buyback stock, etc.

Those subject to the DFAST are bank holding companies, savings and loan companies, and state member banks with total assets greater than $10 billion and nonbank financial firms that are designated by the Financial Stability Oversight Council for supervision by the Federal Reserve.

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