Bank of America, Wells Fargo Say They Pass Midyear Stress Tests

Bank of America and Wells Fargo said Monday their capital levels would remain above regulatory minimums in the event of a hypothetical, “severely adverse” economic downturn.

The findings result from midyear “stress tests” that the largest U.S. banks must conduct under the Dodd-Frank financial-reform law. The banks must put themselves through the tests twice annually: at the beginning of the year and the middle.

Charlotte, N.C.-based Bank of America predicted Monday its Tier 1 common capital ratio could drop to a low of 8.4 percent in the hypothetical stressed scenario, the same low the bank predicted in last year’s test.

The Tier 1 common capital ratio is a measure of a bank’s buffer against losses. Regulators require a minimum of 5 percent.

Bank of America said its other capital ratios would also exceed regulatory minimums under the hypothetical scenario.

San Francisco-based Wells Fargo forecast its Tier 1 common capital ratio could fall to a low of 9.6 percent, below the 9.9 percent minimum it predicted in its test year.

Wells Fargo expected its other capital ratios to be above required minimums.

The midyear tests are based on how the banks would fare over a nine-quarter period that ends in June 2016.

While both Bank of America and Wells Fargo based their tests on hypothetical recessions affecting the U.S. and world markets, their expectations on how those recessions would play out differed.

For example, Bank of America predicted U.S. unemployment would hit a high of 11.1 percent during the nine-quarter period, slightly higher than Wells Fargo’s predicted high of 11 percent.

Also Monday, Winston-Salem’s BB&T said it passed its stress test.

The bank-run stress tests are different from the Federal Reserve’s annual stress-testing to find out whether big banks would be able to maintain minimum capital ratios in an economic downturn.

The Fed tests are used to determine whether banks can return capital to shareholders, such as through dividend increases or buying back shares. The latest results of those tests were released in March.

Bank of America and Wells Fargo both passed those tests and received Federal Reserve approval for their capital plans.

That cleared the way for Bank of America to increase its common stock dividend for the first time since the financial crisis. The bank said it would raise the quarterly dividend from 1 cent per share to 5 cents per share.

But in April, the bank announced it was suspending the planned dividend increase after it discovered it had been miscalculating capital ratios.

In August, the bank announced it would raise the dividend to 5 cents after the Fed did not oppose a resubmitted capital plan. But the bank said it would scrap plans to buy back $4 billion in common stock, which had been part of its original plan the Fed approved in March.

This article appeared in print in the September 17th, 2014 edition of Hamodia.