Fed bank stress test: 13% unemployment, 50% stock market drop wipes some banks out

March 14, 2012 – WASHINGTON – Citigroup was one of four large U.S. banks that flunked stress tests aimed at seeing how they would hold up in a new economic crisis, Federal Reserve data showed Tuesday. Three others — Ally, Suntrust and MetLife — also failed the tests, while 15 other large bank holding companies passed the exercise, the Fed said. As a group, though, the 19 came through strongly, said the Fed, thanks to pressure for them to boost capital over the past three years as the financial sector digs its way out of the deep 2008-2009 recession. “In fact, despite the significant projected capital declines, 15 of the 19 bank holding companies were estimated to maintain capital ratios above all four of the regulatory minimum levels under the hypothetical stress scenario,” the Fed said. The exercise opened the door for some of the most capital-flush banks to immediately announce new or higher dividend payments to shareholders, after the Fed prevented or limited such payouts by a number of the banks last year following a similar examination. JPMorgan Chase announced a 20 percent dividend hike and a $15 billion share buyback program, while Wells Fargo also sharply boosted its planned dividend. Bank shares meanwhile surged in the final hour of trade on the U.S. markets after JPMorgan jumped the gun with its announcement that it had passed the tests and would up its dividend. The Fed had originally planned to release the results on Thursday. The central bank’s test subjected the banks to another theoretical crash of the economy to see how they would hold up: a U.S. recession marked by a 50 percent drop in stock prices, a 21 percent fall in housing prices, and joblessness soaring to 13 percent, all the while being buffeted by an even worse recession in Europe. The test saw the 19 together losing $534 billion over nine months. Despite that, the Fed said, at the end of the test period the banks together had core “tier one” capital at a level that was higher than the actual level they had during the financial crisis in early 2009. That “reflects a significant increase in capital during the past three years,” it said. Citigroup was the largest of the four that failed the test — its tier one capital ratio level fell in the theoretical crash to 4.9 percent, below the fed’s 5.0 percent minimal threshold. –Yahoo News