4 of 19 Banks Fail ‘Stress’ Test

Daily Real Estate News | Wednesday, March 14, 2012

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Four of the the country’s 19 largest banks do not have enough capital to withstand another economic downturn, if one occurs, according to the Federal Reserve’s latest stress test for banks.  

The four banks at risk named in the report are Citigroup, SunTrust, Ally Financial, and MetLife. 

The hypothetical stress test, conducted annually by the Federal Reserve but not usually released publicly, analyzes if banks could weather the storm if the economy saw a 21 percent reduction in home prices, 13 percent unemployment, and a 50 percent drop in stock prices. The test aims to see which banks would be able to continue to lend money to individual and businesses even if such catastrophic losses occurred. 

For any banks that fail the stress test, the Fed can force them to raise money, such as by selling additional stock or issuing debt. 

For the banks that did pass, they are able to raise their dividends and take action in luring more investors to their stocks. This year’s results are “clearly good news — the U.S. banking system can now withstand a quite severe recession without falling over,” Douglas Elliott, a fellow at Brookings Institution, told the Associated Press. Among the banks that passed the stress test are U.S. Bancorp, JPMorgan Chase, and Wells Fargo.

Source: “Federal Reserve Annual Stress Test Fails 4 of 19 Big Banks,” The Associated Press (March 12, 2012)