“Federal Reserve stress tests found Bank of America, Morgan Stanley and Goldman Sachs would suffer huge losses in a financial crisis, curbing their ability to return capital to shareholders.”
“All the major US banks passed the tests, which modelled a hypothetical recession and market meltdown to gauge the resilience of the financial system. Of 30 banks tested, only Zions, a Utah-based lender, failed to maintain a minimum capital ratio of 5 per cent equity to risk-weighted assets.”
“But BofA, Morgan Stanley, JPMorgan and Goldman all came out with less than a 7 per cent capital ratio – much weaker than anticipated.”
“In the crisis scenario, BofA would make a $49.1bn loss, the worst performance of any of the banks and its capital ratio would plummet to 6 per cent before any share buybacks or higher dividends.”
The tests were used as the basis for the Fed’s assessment of banks’ capital return plans, which will be released on Wednesday.”
“Any bank whose dividend and buyback plans would cause it to burn through the 5 per cent capital threshold could suffer an embarrassing veto by the Fed and have to resubmit a lower request.”
Read full Financial Times article here.