Four US banks fail Fed stress test

The US Federal Reserve said Tuesday that four major US banks have failed to pass its latest round of stress test.

Citigroup, SunTrust, Ally Financial and MetLife have failed the stress test carried out by the central bank according to a series of stringent standards, Xinhua reported.

The Fed said 15 of the 19 major bank holding companies (BHCs) were estimated to “maintain capital ratios above all four of the regulatory minimum levels under the hypothetical stress scenario,” while the other four failed to show they have enough capital to tide over another severe economic downturn.

The banks failed to meet the minimum capital requirements after a hypothetic economic recession, including unemployment rate surging to 13 percent, in this year’s Comprehensive Capital Analysis and Review (CCAR), the Fed’s across-the-board study of the capital plans of the 19 largest BHCs.

The CCAR is the Fed’s major mechanism for developing supervisory assessments of capital adequacy at these firms.

“Reflecting the severity of the stress scenario–which includes 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,” said the Fed.

The central bank noted that all of the big US banks have built up their capital buffers after the financial crisis. The stress test was based on a nine-quarter study period running through the fourth quarter of 2013.

The test was aimed at reviewing the balance sheets of the BHCs to check whether they could withstand another round of economic shock. The Fed can stop those banks failing to pass the test from paying stock dividends or buying back their own stocks.