Looking into the bank stress test results
The Federal Reserve released the results of the Supervisory Capital Assessment Program (a.k.a. the bank “stress tests”) this evening. The tests were designed to measure how well banks would hold up under two scenarios: 1. The “baseline” scenario, where the economy follows the trajectory currently forecast by economists and 2. The “more adverse” scenario, where the economy performs significantly worse than that.
The Fed had an inside look at banks’ assets and supposedly was able to determine whether banks had enough capital to survive should the economy worsen. It’s the same thing that banks are supposed to do on their own, but given the failure of many banks to do just that, the Fed thought it was in the best interest of the economy to do it for them and make it public.
The results weren’t all that surprising. The Fed wants the banks to raise about $75 billion in total. Banks that have to raise a lot include Bank of America and Wells Fargo. Banks that don’t have to raise anything include J.P. Morgan and Goldman Sachs.
But if you take a look at the actual report, there are a lot of interesting items that aren’t in most of the first blush news stories I’ve seen.
For example, take a look at this chart from the report. It shows which banks would lose the most if the Fed’s “more adverse” scenario took place.
As you can see (if you can squint and read the names), State Street’s assets are the most vulnerable to an economic downturn. Metlife is the least vulnerable. The chart doesn’t show who needs to raise more capital (GMAC would have low losses, for example, but it has no capital buffer), but it does show how stock investors should expect their companies will be affected if things get worse.
If you’re invested in any of the banks tested by the Fed, you owe it to yourself to flip to the end of the report where they detail possible losses in each asset class for each bank. I wouldn’t buy or sell a stock based on the information alone. After all, everybody has the report and much of it might be priced into the market already. But it will help you understand just what kinds of losses your companies are exposed to should the rosier forecasts that have driven the market upward don’t take place and the adverse scenario occurs. And it’s not every day that banks make that information public.
— Joe Light
