Bank of America Shows Soft Results in Recent Stress Tests

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Bank of America

Shares of Bank of America (NYSE:BAC) were trading mostly in the red throughout Friday’s market session, after the results of the Federal Reserve-administered stress tests came back. The majority — twenty-nine of the thirty banks tested — proved able to pass, though one, Zion Bancorporation (NYSE:ZION), failed the test. However, Bank of America reportedly “struggled” as well, sending ripples of concern through its investor base. 

The banks had to show that they could remain well-capitalized, with Tier 1 common equity ratios of at least 5.0 percent, through a nine-quarter “severely adverse” economic scenario, The Street explained. Only eighteen banks were tested last year with the Dodd-Frank Act Stress Tests, or DFAST; Zion was one of the newcomers.

Though it barely passed, Bank of America had the third-weakest Tier 1 equity ratio, at 6 percent. Though one bank, M&T Bank, fell between it and Zion (which had a ratio of 3.5 percent), it “is in the midst of getting its Bank Secrecy Act and anti-money laundering compliance house in order,” since it’s gearing up to finish off the delayed acquisition of Hudson City Bancorp HCBK.

The testing scenario set forth this year assumed an increase in the U.S. unemployment of 4 percent, The Street said. This implies a fictional unemployment rate peaking at 11.25 percent in mid-2015, and includes a decline in real U.S. GDP of nearly 4.75 percent through the end of 2014, a 50 percent decline in equity prices, and a 25 percent decline in home prices.

The adverse scenario portion also international variables, like recessions Europe and Japan, and slowing growth in Asia.

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