Four major U.S. banks failed to show they have enough capital to survive another serious downturn, the Federal Reserve reported Tuesday. The list included Citigroup, the nation’s third-largest bank, in a finding that stunned many industry watchers.
The Fed said 15 of the 19 major banks passed the test, conceived after the recent financial meltdown to give investors a clear picture of the fundamental health of the country’s biggest financial institutions. The Fed noted that all 19 banks are in a much stronger position than immediately after the 2008 financial crisis.
Still, SunTrust, Ally Financial and MetLife joined Citi in failing to meet the test’s minimum capital requirements.
The Fed reviewed the bank balance sheets to determine whether they could withstand a crisis that sends unemployment to 13 percent, causes stock prices to be cut in half and lowers home prices 21 percent from today’s levels - extreme conditions that few mainstream economics are forecasting.
Still, Citi’s failure came as a shock. Analysts were expecting the bank to pass, especially after it reported two years of profits. Some analysts expected the bank to be able to increase its dividend to 10 cents a share and even buy back stock. Citi’s stock fell 4 percent in the after-market.
For those banks that failed, the Fed can stop them from paying stock dividends or buying back their own stock. The Fed can also force them to raise money by selling additional stock or issuing debt.
Last year, the Fed allowed some banks - including JPMorgan Chase and Wells Fargo - to raise their dividends because they were deemed healthier.
The Fed has conducted the stress tests each year since 2009. This was the first time since then that the results have been made public. The central bank released the results two days earlier than planned after JPMorgan sent out a press release saying it had passed the test.
After the first round of tests, in 2009, the Fed ordered 10 banks to raise a total of $75 billion. Bank of America alone was told to raise $34 billion.
This year’s test is more rigorous than earlier tests because the Fed wanted to be assured that the industry is prepared to meet more stringent international banking rules that go into effect in 2013.
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