Fed 'stress test': banks would lose $460bn if crisis struck again
AMERICA’S biggest banks would face losses of almost half a trillion dollars should a deep financial crisis and recession hit the US again, regulators said.
The tests also showed that both Goldman Sachs and Morgan Stanley's key ratio was the weakest of all the banks after Ally Financial, which is still owned by the US taxpayer. Goldman's ratio dropped to 5.8pc, with the investment bank facing a loss of $20.5bn under the most extreme scenario.
The losses of $462bn (£308bn) for the country's biggest 18 banks were projected by the Federal Reserve's 'stress test', an annual exercise the central bank now conducts to monitor the resilience of the financial system.
The losses would be racked up under the Fed's most extreme scenario in which unemployment climbs to 12pc, house prices tumble 21pc and stock markets halve in value over the next two years. Overall, the Fed said that just one of the banks it tested, Ally Financial, failed to maintain a 5pc Tier 1 common equity ratio - a key measure of a lender's health - under the most extreme scenario.
Banks "have continued to improve their ability to withstand an extremely adverse hypothetical economic scenario and are collectively in a much stronger capital position than before the financial crisis," the Fed said last night.
However, the tests also showed that both Goldman Sachs and Morgan Stanley's key ratio was the weakest of all the banks after Ally Financial, which is still owned by the US taxpayer. Goldman's ratio dropped to 5.8pc, with the investment bank facing a loss of $20.5bn under the most extreme scenario. Morgan Stanley's ratio slid to 5.7pc, leaving it with a loss of $19.4bn under the same scenario, while the Bank of New York Mellon had the highest Tier 1 equity ratio of 13.2pc.
Citigroup, which failed the stress test last year, had a much higher ratio of 8.3pc.
Next week, the Fed will release the results of a second stress test that regulators will use to decide whether to approve plans banks may have for paying dividends or buying back shares.
Since the financial crisis, lenders have required the approval of the Fed as the US tries to guard against the prospect of another taxpayer bail-out should another financial crisis erupt.