Today, the Federal Reserve released, in conjunction with the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the U.S. Treasury, the results of its "stress tests" on the 19 largest U.S. bank holding companies (BHCs) pursuant to the Supervisory Capital Assessment Program (SCAP). The SCAP assessments were undertaken to measure how much of an additional capital buffer, if any, each BHC would need to establish to "ensure it would have sufficient capital if the economy weakens more than expected." Federal Reserve Chairman Ben S. Bernanke emphasized that "These examinations were not tests of solvency," rather, the SCAP was a "forward-looking, "what-if" exercise intended to help supervisors gauge the extent of the additional capital buffer necessary to keep these institutions strongly capitalized and lending, even if the economy performs worse than expected between now and the end of next year." Treasury Secretary Timothy Geithner stated that the stress test results will "help ensure that banks have a sufficient capital cushion to continue lending in a more adverse economic scenario," and "provide the transparency necessary for individuals and markets to judge the strength of the banking system."
The results of the SCAP assessments suggest that, if the economy were to follow a "more adverse" scenario involving a "deeper and more protracted downtown," rather than the economy following the "then-current consensus forecast," then aggregate losses at the 19 BHCs during 2009 and 2010 could be $600 billion. Most of those estimated losses, "approximately $455 billion," would come from losses on their accrual loan portfolios, particularly from residential mortgages and consumer-related loans. To arrive at the estimated losses, the participating BHCs were asked to estimate their potential losses on loans (estimated forward looking, undiscounted credit losses or "cash flow losses"), securities (focusing on the credit risk associated with each BHC's available-for-sale and held-to-maturity investment portfolios, the impairment of any securitized assets and any material exposures to corporate bonds, mutual funds and other asset-backed securities), and trading positions (estimated potential trading-related market and counterparty credit losses under a market stress scenario) as well as pre-provision net revenue (the resources each BHC would have available to absorb losses during 2009 and 2010) and the resources available from the allowance for loan and lease losses under two alternative macroeconomic scenarios. These estimates were reviewed and analyzed and then evaluated against independent benchmarks developed by supervisors to arrive at the estimated losses.
To guard against these additional estimated losses under the "more adverse" scenario, the supervisors have established a "SCAP capital buffer" for each BHC that is sized to achieve a Tier 1 risk-based ratio of at least 6% and a Tier 1 Common capital ratio of at least 4% at the end of 2010 under the "more adverse" economic scenario. Based on this approach, the supervisors determined that, as of the end of 2008, 10 of the 19 BHCs would have needed to add an aggregate $185 billion capital buffer, "the vast majority of which needs to be in the form of Tier 1 Common capital." However, after taking into consideration various asset sales, capital raisings and capital restructurings since the end of 2008 that have increased Tier 1 common capital, the supervisors concluded that the 10 institutions' aggregate required SCAP capital buffer is approximately $75 billion. Each of the 10 BHCs will be required to develop a detailed capital plan to be approved by their primary supervisors (after consultation with the FDIC and Treasury), and to implement the plan over the next six months.
The amount of SCAP capital buffer recommended for the 10 BHCs is as follows:
- Bank of America Corporation - $33.9 billion. Kenneth D. Lewis, Chief Executive Officer and President, stated that "We are comfortable with our current capital position in the present economic environment," and "[w]e are working on a plan to submit to the government" for any contingency, however Bank of America "[w]ill not need any new government money."
- Citigroup, Inc. - $5.5 billion. Vikram Pandit, Chief Executive Officer, stated that Citigroup "will expand its public exchange offers previously announced on February 27, 2009 by increasing the maximum amount of preferred securities and trust preferred securities that it will accept in exchange for common stock from $27.5 billion to $33 billion to further increase Tier I Common without any additional U.S. government investment or conversion of U.S. government securities into common shares."
- Fifth Third Bancorp - $1.1 billion. Kevin Kabat, President, Chairman and CEO of Fifth Third Bancorp, stated that "We have outlined and implemented a number of steps over the past year to strengthen our common equity position to prepare for potential economic deterioration. We expect to meet this new commitment to further reinforce our capital composition within six months through additional private market actions. We do not expect to further utilize government capital programs."
- GMAC, LLC - $11.5 billion. Alvaro G. de Molina, Chief Executive Officer, stated that the company "support[s] the government's efforts to shore-up the banking system and expect[s] that the additional capital raised will further strengthen GMAC and aid in achieving our strategic objectives." He further stated that GMAC will have "[i]ncreased the common shareholder equity component of Tier 1 capital by $11.5 billion, of which $9.1 billion must be new Tier 1 capital," and to do so, GMAC may issue "[n]ew common equity or issu[ue] mandatory convertible preferred shares or conversion of existing equity into a form of Tier 1 common equity."
- KeyCorp - $1.8 billion. Henry Meyer, Chairman and Chief Executive Officer, stated that "the assumptions in the hypothetical stress test were extremely conservative, even for the more adverse economic scenario, and we believe that actual losses and earnings performance will be better than these test results." In addition "Key has a range of available alternatives to raise the common equity from non-governmental sources over the next six months," including "exchanges of common shares for outstanding preferred and trust preferred shares, issuing common shares, or other alternatives."
- Morgan Stanley - $1.8 billion. Morgan Stanley stated that "Given the $2.7 billion impact on tangible common equity resulting from the closing of the Smith Barney joint venture an increase in capital is consistent with the Firm's own long-term capital plan, and will be addressed by the $2 billion common stock offering announced today."
- PNC Financial Services Group, Inc. - $0.6 billion. PNC stated that it plans to "satisfy the requirement to increase common shareholders' equity by $600 million" under the SCAP "[t]hrough a combination of growth in retained earnings and other capital market alternatives," but PNC has "no plans to convert preferred shares issued under the U.S. Treasury Department's Capital Purchase Program."
- Regions Financial Corporation - $2.5 billion. Regions stated that "[t]he SCAP results do not accurately reflect the loan losses that Regions is likely to experience even in the 'more adverse' economic scenario," however, the company "[h]as committed to increase its common equity by $2.5 billion." Sources of capital "[a]re expected to be entirely non-governmental and to include (i) liability management strategies, and (ii) the issuance of common equity or securities convertible into common equity that satisfy the regulators’ requirements in public and/or private transactions," or Regions may "choose to sell selected non-core businesses or assets or take other actions to reduce its risk-weighted assets as part of the plan; however, sales of core businesses are not contemplated."
- SunTrust Banks, Inc. - $2.2 billion. James M. Wells III, Chairman and Chief Executive Officer, noted that, "We are not surprised that the stress test has confirmed that SunTrust is a well-capitalized institution." Mr. Wells further stated that the company has "the capital resources we need to withstand expected, and even more severe, economic pressures. That said, we also have access to ample sources of additional capital to support our efforts to serve our clients and support our communities."
- Wells Fargo & Company - $13.7 billion. Howard Atkins, Chief Financial Officer, stated that the company "[i]s strong, secure, well capitalized, growing market share and we’re building capital every day through retained earnings and expense initiatives related to the Wachovia merger," and that the "[m]ain reason the Federal Reserve has required Wells Fargo to hold an extra $13.7 billion in Tier 1 common equity is based on what we believe is their excessively conservative estimate of pre-provision net revenue in the adverse scenario."
According to the supervisors' announcement, no SCAP capital buffer was recommended for American Express Company, BB&T Corporation, Bank of New York Mellon, Capital One Financial Corporation, Goldman Sachs Group, Inc., JP Morgan Chase & Co., MetLife, Inc., State Street Corporation and U.S. Bancorp.