Fed says top banks stronger

WASHINGTON (AP) ― All but one of the nation’s 18 largest banks are more prepared to withstand a severe U.S. recession and a global downturn than at any time since the 2008 financial crisis, the Federal Reserve says.

Results of the Fed’s annual “stress tests” showed Thursday that as a group, the 18 banks hold fewer bad loans compared with last year, thanks to a stronger economy. The Fed will announce next week whether it will approve the banks’ plans to issue dividends or repurchase shares.

The Fed’s data show that one of the banks, Ally Financial Inc., would have a much lower capital buffer against losses than the others under the most severe scenario. Ally’s projected capital level is below the minimum that the Fed considers a bank would need to survive a severe recession.

But Fed officials wouldn’t say whether that means it would reject Ally’s request for issuing dividends or buying back shares, if Ally were to make one.

Last year, government-owned Ally ― the former financial arm of General Motors ― was the worst-performing bank in the Fed’s stress tests. It was one of four banks that failed the tests and were not allowed to raise their dividends or repurchase shares. The others were Citigroup Inc., SunTrust Banks Inc. and MetLife Inc., which has since sold its banking operations and is no longer tested.

Citigroup objected to any characterization that it had failed the 2012 test. It said it had enough capital to withstand the Fed’s crisis scenario, just not enough to do that and raise its dividend at the same time.

In a statement, Ally countered that it is well-capitalized and called the Fed’s analysis for calculating the bank’s potential losses “fundamentally flawed.”

“While Ally appreciates the Fed’s role in ensuring that financial institutions have adequate capital during stressed situations, using flawed assumptions could have lasting adverse impacts on the economy, including ultimately causing banks to reduce certain key lending categories,” the bank said.

The 18 banks were tested on how they would withstand severe downturns not only in the United States but also in Europe and in Asian countries including China and Japan.

Under the stress tests’ most severe scenario, the United States would undergo a recession in which unemployment would reach nearly 12 percent, stocks would lose half their value and home prices would plunge 20 percent.

The Fed said that under the most severe scenario, the 18 banks would suffer combined losses of $462 billion through the fourth quarter of 2014.