New Report: 1 in 8 Banks Fail Stress Test

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October marks the four year anniversary of the Troubled Asset Relief Program that was voted and approved by Congress. In addition to TARP, several monetary easing programs from the Federal Reserve have been launched in order to prop up asset prices and keep the status quo of the financial system. However, a new report reinforces the belief among many that the system is still on thin ice and nothing has truly been resolved.

Trepp, a leading provider of information and analytics to the banking markets, recently released its first Capital Adequacy Stress Test Report of U.S. banks. The New York based firm used its model to analyze and evaluate stressful conditions of balance sheets and income statements of more than 6,000 domestic banks. Trepp’s model is inspired by the framework used by the Federal Reserve’s Stress Testing of the 19 largest banking institutions earlier this year. It combines data from each bank with dramatic adverse inputs to produce “what-if” scenarios for earnings, capital and asset performance for a nine quarter projection period. The outcomes were not comforting to say the least.

The results showed that one in eight banks received a failing grade. “A significant number of banks are at risk of falling short of capital adequacy requirements unless they take some type of corrective action,” said Trepp’s lead bank analyst, Matthew Anderson, according to a press statement. “The report shows that the industry still has a way to go before a full recovery.”

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Trepp tested 6,151 banks in their model using data from the second quarter of 2012. Of those banks, a whopping 784 did not pass, or almost 13 percent. The failed banks did not meet the minimum requirements for capital adequacy. Trepp explains, “A passing grade required a bank to maintain ratios in excess of regulator-defined thresholds assuming severe stress on 12 macroeconomic variables, including real GDP growth, unemployment, interest rates and home prices.” An estimated $25 billion to $27 billion of capital would be required in aggregate to achieve a passing grade.

The results also highlight an area of concern among mid and small-sized banks, along with specific geographic pockets of weakness. The highest percentages of failure occurred for banks with under $10 billion in assets. Banks in states such as Florida, Georgia, Illinois and Minnesota were among the worst in the nation.

Anderson would not detail how well the “Too Big Too Fail” banks performed, but he claims they are in better shape than they were at the beginning of the financial crisis. However, most of the big banks still have a lot of work to do before they earn the trust of shareholders and taxpayers, if that is even possible. Over the past five years, shares of American International Group (NYSE:AIG) and Bank of America (NYSE:BAC) have fallen 97 percent and 82 percent, respectively. Citigroup (NYSE:C), which failed the Federal Reserve’s Stress Test earlier this year, has experienced a 92 percent plunge in its stock price. The best performers among the major banks include Wells Fargo (NYSE:WFC) with a 5 percent dip, and JPMorgan Chase (NYSE:JPM) with a 10 percent decline.

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